Delinquencies in LAP Portfolio Could Exceed 5%: Delinquencies in India’s loan against property (LAP) portfolio, which have been modest till the last year, could significantly increase in the next four quarters, says India Ratings and Research (Ind-Ra). Delinquencies may even exceed 5% on a static basis for a few non-bank financial institutions (NBFCs), about 3x of those in FY14. The signs of early stress are clearly visible in the LAP business loan pools assessed by Ind-Ra, indicated by a sharp rise in 90 days past due (dpd) delinquencies for some of the large players. A combination of stagnant property prices especially in metros and large cities, which are the primary markets for medium and large ticket LAP, and squeeze on refinancing due to risk aversion building up in some financiers is bringing the stress to the fore.
Concurrent Rise in Delinquencies: The data analysed by Ind-Ra suggests there is limited statistical correlation between delinquency rates and loan to value (LTV) ratios. Ind-Ra’s study on its LAP portfolio generated in the last five years, indicates that all loans, irrespective of their year of origination, are experiencing the highest level of delinquencies in 2016. Slippages in LAP are rising concurrently across the years of origination, though LTVs of earlier vintage loans have reduced due to a secular rise in property prices and principal amortisation, indicating a cliff effect. Having said that, the portfolio with lower LTVs is likely to have a lower loss given default (LGD).
Shrinking Spreads Leaving Limited Buffers to Absorb Shocks: Ind-Ra believes the LAP market is entering into a delicate phase, where though yields are shrinking, credit costs have started to build up. High yields in the early part of this decade in the LAP segment (almost 500 bps higher than State bank of India’s (‘IND AAA’/Stable) base rate) and negligible credit costs (below 30 bps) offering a high risk adjusted return had attracted many players; some of which did not necessarily had a core competency in the segment. Nevertheless, intense competition has pulled the yields significantly which have shrunk to about 300bp over State Bank of India’s base rate. After adjusting for yield reversals on NPLs and operating costs, yields may not, at least for few players with uncompetitive funding costs, leave enough buffers to absorb spikes in credit costs.
This is an excerpt from India Ratings Loans Against Property report
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