Crisil Ratings on Thursday cautioned that delinquencies in the loan against property (LAP) market are set to rise 70 basis points to 3.3 per cent this fiscal. This is in view of the underlying risks stemming from moderating growth, intensifying competition and falling yields coming to the fore.
While it had flagged these risks in November 2016, the credit rating agency said 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, or NBFCs, and housing finance companies, or HFCs).
Crisil said the LAP segment has been growing at break-neck speed, with assets under management (AUM) rising 17 per cent to ₹1.7 lakh crore in fiscal 2017 from ₹1.5 lakh crore in 2016, which, in turn, was a 29 per cent growth over 2015.
The agency observed that banks then joined the fray because of continuing sluggish demand for corporate credit. But this rising trend in AUM is set to reverse with risks manifesting and delinquencies rising.
Crisil foresees a 200-400 bps decline in AUM growth to 13-15 per cent by fiscal 2020, as competition from banks intensifies and ticket sizes of loans shrink. One basis point equals one-hundredth of a percentage point.
And intensifying competition has meant ‘seasoning’ of LAP loans — which is important to asset quality — has been low, with aggressive intermediaries spurring balance transfers in approximately seven out of 10 loans.
While the typical contracted tenure of an LAP product is 7-10 years, most customers have been shifting out in 36-42 months.
To get a handle on asset quality when adjusting for rapid growth and low seasoning, Crisil considers delinquencies on a two-year lagged basis. By this yardstick, delinquencies are expected to rise even more, to 4.5 per cent this fiscal, or 370 bps higher than what’s expected in home loans.
“Interestingly, the rise in delinquencies last fiscal was not uniform. While large HFCs and a few NBFCs 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,”said Krishnan Sitaraman, Senior Director, Crisil.
According to the agency’s analysis, 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, too. As a result, Crisil estimates net interest margins (NIMs) to slip 50-70 bps to 3.5-4 per cent this fiscal.