The rapid growth in the housing segment is set to leave lenders with a new challenge — as defaults are also on the rise. At a time when the banking system is struggling to check non-performing assets (NPAs), the property loan market is witnessing a flurry of defaults, mostly impacting non-bank lenders.
Delinquencies, or debt on which payment is overdue, in the Rs 1,70,000-crore loan against property (LAP) market are set to rise 70 basis points (bps) to 3.3 per cent this financial year, or Rs 5,600 crore, even as underlying risks stemming from moderating growth, intensifying competition and falling yields come to the fore, rating agencies have warned.
Defaults are set to rise further. While trying getting a handle on asset quality when adjusting for rapid growth and low seasoning, rating agency Crisil has considered delinquencies on a two-year lagged basis. By this yardstick, delinquencies are expected to rise even more, to 4.5 per cent, or over Rs 7,600 crore this fiscal, or 370 bps higher than what’s expected in home loans.
The rising slippages in the property loan market — where borrowers pledge their property for loan — have coincided with the spurt in the general across-the-board increase in bad loans in the banking system. While these risks were flagged in November 2016, the rise in delinquencies (measured by 90 days’ past due) has been sharper and sooner than expected, affecting non-banks (including non-banking finance companies and housing finance companies).
The LAP segment has been growing at break-neck speed, with assets under management (AUM) rising 17 per cent to Rs 1.7 lakh crore in fiscal 2017 from Rs 1.5 lakh crore in 2016, which, in turn, was a 29 per cent growth over 2015. “Banks then joined the fray because of continuing sluggish demand for corporate credit,” Crisil said.
“Many banks have already tightened the rules for property loans. The loan-to-value ratio of the property loan has come down,” said a banking source. However, the property loan market is set to decline. The rising trend in AUM is set to reverse with risks manifesting and delinquencies rising. A 200-400 bps decline in AUM growth to 13-15 per cent by fiscal 2020 is expected, as competition from banks intensifies and ticket sizes of loans shrink, it said. And intensifying competition has meant that ‘seasoning’ of LAP loans — which is important to asset quality — has been low, with aggressive intermediaries spurring balance transfers in about 7 out of 10 loans. “While the typical contracted tenure of an LAP product is 7-10 years, majority of customers have been shifting out in 36-42 months,” Crisil said.
While the sluggish trend in the real estate market contributed to the defaults, competition also played a role in the rising loan slippages.
ICRA, another rating firm, has said the increasing number of new entrants in the housing finance market, coupled with the focus of existing players, has increased the competitive intensity in the industry, leading to the dilution in lending norms. Even while housing loans continue to dominate the loan portfolio of housing finance companies (HFCs), the share of housing loans in the overall HFC portfolio has been declining, owing to the higher pace of growth of non-housing loans. ICRA studied the portfolio cuts of 28 HFCs, which account for over 75 per cent of the overall housing loan portfolio of HFCs as on March 31, 2017. Unlike their larger counterparts, the non-housing loan books of small HFCs largely consisted of LAP, which accounted for 25 per cent of the total loan book as on March 31, 2017, compared with 14 per cent for all HFCs.
“Interestingly, the rise in delinquencies last fiscal was not uniform,” said Krishnan Sitaraman, senior director, Crisil Ratings. “While large HFCs and a few NBFCs (non-banking financial companies) with robust diligence ecosystems managed their portfolios well, some others have reported over 100 bps increase. We believe systemic delinquencies will rise further as LAP portfolios season.” Intense competition has also culled yields by 200 bps in the past 18 months, materially narrowing the spreads between LAP and home loan rates. But, profitability is unlikely to decline much because borrowing costs have fallen. As a result, net interest margins (NIMs) are set to slip 50-70 bps to 3.5-4 per cent this fiscal.
“To be sure, credit costs will tick up as delinquencies rise, but they will remain manageable. That, coupled with income from prepayment charges of 2-4 per cent, is expected to result in return on assets of 1.4-1.8 per cent this fiscal, compared with 2-2.5 per cent in fiscal 2016. Given the pressure on yields, ability to manage operating and credit costs will determine business sustainability over the medium term. So, non-banks with a large customer base — and therefore, cross-selling opportunities — could benefit from lower cost of customer acquisition and access to credit history,” it said.
“One LAP segment where yields and profitability have sustained so far is loans below Rs 25 lakh, because of fewer lenders,” said Subha Sri Narayanan, associate director, Crisil Ratings. “However, small-ticket loans are not an easy business to master. Higher risks to cash flows of borrowers, collateral quality issues, and high operational intensity make rapid scale-up difficult in the segment.”
Lenders which prudently assess borrower cash flows, control loan-to-value ratios, practice strict valuation discipline, and keep a hawk’s eye on portfolios will be able to sustain a profitable business over the longer term. In this business, cash flows are the key driver of repayment trends, and collaterals offer only a fall-back option, agencies said.
India Ratings has anticipated a demand for 25 million homes (4 times of the entire current housing finance stock) over FY17-FY22 in the medium income group (MIG) and lower income group (LIG) categories. A combination of factors such as: government financial and policy thrust, regulatory support, rising urbanisation, increasing nuclearisation of families, and increasing affordability are converting latent demand into a commercially lucrative business opportunity. The sector is also expected to attract over Rs 20,000 crore of equity inflows over FY17-FY22 which would support growth. This also means the size of property loan market is also likely to expand in a similar manner.