Contact Your Financial Adviser Money Making MC
6
October 2016
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| property-prices (The Total Investment & Insurance Solutions) |
Delinquencies in India's non-banking
financier's loan against property (LAP) portfolio could significantly increase
in the next four quarters and may even exceed 5% on a static basis for a few
players, says India Ratings and Research (Ind-Ra). The Total Investment
& Insurance Solutions
In a research note, the ratings
agency says, "A combination of stagnant property prices especially in
metros and large cities, which are the primary markets for large and medium
ticket LAP, and squeeze on refinancing due to risk aversion building up in some
financiers is bringing stress to the fore.” The Total Investment
& Insurance Solutions
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| property-prices 1 (The Total Investment & Insurance Solutions) |
Ind-Ra sees signs of early stress in
the LAP business loan pools assessed by it, including a sharp rise in 90 days
past due delinquencies for some of the large players.
Ind-Ra analysed data from the LAP
portfolios generated over the last five years and observed that all loans,
irrespective of their years of origination, are experiencing a concurrent rise
in delinquencies in 2016. The Total Investment & Insurance
Solutions
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| property-prices 2 (The Total Investment & Insurance Solutions) |
According to the ratings agency, the
LAP market has now entered into a delicate phase with rising delinquencies
accompanied by shrinking yields, thereby leaving limited buffers to absorb
unexpected shocks. The Total Investment & Insurance Solutions
The average lending rate in the
urban high-ticket LAP segment has shrunk to close to 300 basis points (bp) from
500bp over State Bank of India (SBI)'s base rate, which in Ind-Ra's opinion may
not be adequate to absorb any spike in credit costs. The Total Investment
& Insurance Solutions
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| property-prices 3(The Total Investment & Insurance Solutions) |
Increasing acceptance of
non-residential properties as collateral may impact liquidation recovery, the
ratings agency says, adding, "The quest to expand loan portfolio in the
face of intensive competition has diluted the use of risk mitigation practices.
Non-residential properties, including industrial, commercial, freehold land,
unoccupied residential property, among others are increasingly being accepted
as collaterals. This proportion could go as high as 30% of the portfolio for
some players. While loan-to-values (LTVs) are lower for non-residential
properties, realisation on liquidation is also lower for these
properties."
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| property-prices 4 (The Total Investment & Insurance Solutions) |
Ind-Ra says its study on the
recovery of SME loans pool acquired by asset reconstruction companies (ARCs)
through non-residential collaterals indicates a poor recovery at 25% of
principal outstanding (POS). The Total Investment & Insurance
Solutions
The ratings agency says it believes
that the eventual losses through the liquidation route could be higher than
what is being priced in by non-banking financial institutions (NBFIs).
Ind-Ra's rated transaction pool data
for the housing loan mortgage portfolio acquired by asset reconstruction
companies since 2006 show a recovery rate of over 100% of principal
outstanding, but when adjusted for the time value it drops to 70%.
Over the last few quarters,
portfolio churn, through balance transfer among NBFIs, has been the significant
driver of incremental loan growth. Additionally, a large segment of the market
utilised third-party intermediaries to expand its loan portfolio. This has led
to less than optimum credit assessment rigour. Furthermore, elevated balance
transfer has led to inadequate seasoning for a part of the portfolio, the
ratings agency added. The Total Investment & Insurance Solutions
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| property-prices 5 (The Total Investment & Insurance Solutions) |
As per Ind-Ra observations, a small
ticket LAP portfolio has shown a better performance than large ticket loans,
though the portfolio is less seasoned. It says, "Newer geographies are
facilitating volume growth and due to limited competitive intensity, are
allowing lenders to price in the risk. Also, the recent applicability of
SARFAESI Act (to systemically important NBFIs and on a loan amount higher than
Rs1 crore) may improve portfolio performance as it could reduce slippages and
improve recovery." The Total Investment & Insurance Solutions
As per the ratings agency, credit
appraisal systems based on borrower cash-flow assessment and standardised
valuation practices would be critical risk mitigants. "We expects players
with largely residential mortgage collaterals to fare well on asset quality
metrics. Finally, strong equity and liquidity buffers and matched asset
liability profile would continue to differentiate players in this
segment," Ind-Ra concluded.The Total Investment & Insurance
Solutions
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