Moody warns against risks from loan against property

Moody’s Investors Service on Friday said the overall asset profile of property retail loan portfolio of banks is stable although risks are rising in the non-traditional loan against property segment.

“Growth in loan against property (LAP) loans has outpaced overall retail credit growth in recent years, but relatively loose underwriting practices and a tightening in credit following India’s demonetisation would translate into higher asset quality risk,” Moody’s V-P and Senior Credit Officer Srikanth Vadlamani said.

It said it expects the impact on the banks’ overall asset quality to be limited by the relatively small size of the LAP portfolio. The US-based agency expects that the withdrawal of 500 and 1,000 rupee notes in early November 2016 may further expose the weaknesses in the  segment.

“Disruptions in the borrowers’ cash flows may trigger delinquencies while tightening underwriting practices will make it more difficult for them to take out new debt,” it said.  Because LAP loans are typically extended to SMEs and self-employed individuals, a borrower’s ability to repay is often based on the lender’s assessment of the borrower’s income rather than actual reported income, Moody’s said.

Nevertheless, Moody’s expects that the stable performance of the much larger home loan segment will mitigate the negative impact, supported also by the country’s favourable demographics, growing primary market supplies and an increasingly affordable housing segment.

Non-bank finance companies with a higher exposure to the non-traditional end of the market will get impacted more, Vadlamani added.

Moody’s estimates the LAP segment—comprising loans to small-and medium-sized enterprises (SMEs) for business purposes with property as collateral—to have grown at a compounded annual growth rate (CAGR) of 25 per cent between 2012 and 2016, as against 17 per cent for overall retail credit.

However, the unique characteristics of this borrower segment, combined with rapid growth and intensifying competition, are posing risks to this segment of bank loan portfolios, it said.

At the same time, the ready availability of credit has made it easy for borrowers to refinance their debt, thereby potentially masking any weakening in their ability to repay the debt, it said.