Recent reports in the Indian media suggest that the National Housing Bank, the apex body that ensures the smooth functioning of the housing finance system in the nation, is considering a move to cap the amount of Loan to Value Ratio (LTV) or the extent of loan that can be advanced against property by housing finance lenders. This move is being considered of late because of the rising stress in the loan against property (LAP) segment in the nation.
What is a LAP?
LAP as the name itself implies is a loan disbursed against a property that may be either residential or commercial. After a home loan, a LAP is highly recommended as an all-purpose loan by credit experts for any personal or professional use. As per the current regulations there in no cap on the LTV ratio applicable to such loans. LTV denotes how much of the property value a bank can lend to the borrower. While the benchmark for the LTV ratio on such loans disbursed by banks and leading housing finance companies, is 50-55%, in some cases LTV ratio was found to be as high as 80%.
Early signs of stress
In December 2016, India Ratings and Research (Ind-Ra) was the first to alarm the banking system about trouble brewing in LAP segment. An analysis done by the ratings and research agency on the loan pools in the LAP business, that is largely dominated by housing finance companies showed clear signs of stress as there was a significant rise in 90 days past due benchmark mostly for large players. The reason stated by Ind-Ra for this phenomenon was a combination of two factors.
On the one hand property prices were stagnating especially in the metros where most of these LAPs had been disbursed and on the other hand, there was increasing risk aversion in some financiers. What makes it difficult for financiers is the fact that while yields were shrinking, credit costs were on the rise. In the earlier half of the decade, when yields were high in LAP segment and credit costs were negligible, a number of players had entered the segment in the lure of high risk adjusted returns.
Intense competition reverses yields
However, as competition intensified yields began to shrink. As a result, when credit costs began to rise many players who did not necessarily have the competence in the LAP segment begun to feel the heat. This is because the reversal in yields did not leave them enough room to absorb the spike in credit costs after providing for non-performing loans and other operating costs.
In the beginning of 2017, Ambit Capital issued a further warning about the inflated valuations in LAP segment. Ambit Capital in its report raised an alarm against exposure to higher ticket size borrowers (₹ 1 crore and above). Comparatively, self-occupied or residential properties were expected to do much better.
Stress is clearly visible in recent times
Banking analysts looking at the LAP segment closely have pointed out in the media that housing finance companies have steadily increased their exposure to LAP segment to combat home loan competition from larger lending institutions. However, after a series of changes in the real estate segment such as the introduction of the Real Estate Regulation Act (RERA), the move of demonetisation by the Indian Government, and finally the implementation of the universal indirect tax code the Goods and Services Tax (GST) the LAP segment has slowed down significantly.
A report published by another rating agency ICRA states that the growth in LAP has slowed down to 17% in August 2017 from 30% in FY 16. It is noteworthy that the growth was as high as 70% back in FY 10. Not just the growth, but delinquencies have grown significantly with 90 days past due rising to 2.4% by FY 17 from below 1% in FY10. As a cautionary measure, some banks who are active in this segment have decided to go slow in this segment to prevent slippages.
What should a borrower do?
What does all of this imply for the regular borrower, who is interested in a LAP? Long story cut short- If you are a genuine borrower, you have little to worry about. As pointed out earlier, this is a secured loan that can be used for personal or professional purposes. So if you are in dire need of finances, you can still opt for a LAP. However, do bear in mind that like any other line of credit, a high credit score is a pre-requisite for a LAP. A score below 750 and above may hamper your chances of being able to avail of a LAP.
In addition to this, you should check out your own eligibility criteria and ensure other factors are in order when you seek a LAP. For instance, all the records pertaining to yourself such as your id proof, bank statements, IT returns and the like should be in order. With regards to the property, it is of utmost importance to ensure that the title of the property is clear. Further, do bear in mind that if the property you are planning to mortgage is owned by more than one person the co-owners must also apply jointly for the loan. In such a case their credit score will also be considered.
Tread with caution
Once you are assured of your own eligibility, conduct a thorough research on the prospective lenders. As pointed out earlier the leading banks as well as a host of housing finance companies are active in this segment. However, given the current situation you must tread with caution and gather as much as much information as you can about the lender’s loan against property asset book.
As a borrower, do not shy away from asking pertinent questions to find out whether the lender is under duress. If the lender you have approached does not seem to be willing to answer your questions, it should be read as a clear sign to steer clear. Instead opting for a lender that is offering a LAP at a marginally higher rate of interest but has vast experience in the field and a sound portfolio of both home loans and LAPs may prove to be a better choice.
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