Delinquencies in loan against property (LAP) portfolio of non-banking companies could significantly increase in the next four quarters, according to a report by India Ratings and Research.

Delinquencies have been modest till last year. But they may exceed 5 per cent on a static basis for a few non-bank financial institutions (NBFCs).

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, it said.

Based on the data from the LAP portfolios generated over the last five years, it has been observed that all loans, irrespective of their years of origination, are experiencing a concurrent rise in delinquencies in 2016.

India Ratings is of the view that 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 average lending rate in the urban high-ticket LAP segment has shrunk to close to 300 bp from 500 bp over State Bank of India’s base rate, stated , said Harshal Patkar, analyst, India Ratings and Research.

Portfolio churn through balance transfer among NBFCs has been the significant driver of incremental loan growth.

Also, a large segment of the market utilised third-party intermediaries to expand its loan portfolio. The agency believes that it has led to less than optimum credit assessment rigour. Furthermore, elevated balance transfer has led to inadequate seasoning for a part of the portfolio.

However, India Ratings has observed that small ticket LAP portfolio has shown a better performance than large ticket loans, though the portfolio is less seasoned. 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 ₹ 1 crore) may improve portfolio performance as it could reduce slippages and improve recovery.

Credit appraisal systems based on borrowers cash-flow assessment and standardised valuation practices would be critical risk mitigants, according to the agency.

It 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.

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