Rise in delin­quen­cies in LAP af­fect­ing non-banks

Banking Frontiers - - Research Notes - Non-banks - Mo­han@bank­ingfron­tiers.com

Delin­quen­cies in the loan against prop­erty (LAP) mar­ket are set to rise 70 bps to 3.3% this fis­cal, even as un­der­ly­ing risks stem­ming from mod­er­at­ing growth, in­ten­si­fy­ing com­pe­ti­tion and fall­ing yields come to the fore, ac­cord­ing to Crisil. The rise in delin­quen­cies (mea­sured by 90 days’ past due, or dpd) has been sharper and sooner than ex­pected, af­fect­ing non-banks (in­clud­ing NBFCs & HFCs).

Share of struc­tured credit and real es­tate loans has been steadily ris­ing. Op­por­tu­ni­ties in the roads sec­tor will drive the next leg of growth for in­fra­struc­ture. Un­se­cured loans have more than dou­bled in the past 3 years and will al­most dou­ble by 2020, al­though from a low base.

The LAP seg­ment has been grow­ing at break-neck speed, with as­sets un­der man­age­ment (AUM) ris­ing 17% to `1.7 tril­lion in fis­cal 2017 from `1.5 tril­lion in 2016. 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. The rat­ing agency fore­sees a 200-400 bps de­cline in AUM growth to 13-15% by fis­cal 2020, as com­pe­ti­tion from banks in­ten­si­fies and ticket sizes of loans shrink. 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 7 out of 10 loans.

While the typ­i­cal con­tracted ten­ure of a LAP prod­uct is 7-10 years, ma­jor­ity of 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 2-year lagged ba­sis. By this yard­stick, delin­quen­cies are ex­pected to rise even more, to 4.5%, this fis­cal, 370 bps higher than what’s ex­pected in home loans. 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 by much be­cause bor­row­ings costs have fallen, too. Crisil es­ti­mates NIM to slip 50-70 bps to 3.5-4% this fis­cal. Credit costs will rise as delin­quen­cies rise, but they will re­main man­age­able. That, cou­pled with in­come from pre­pay­ment charges of 2-4%, is ex­pected to re­sult in re­turn on as­sets of 1.4-1.8% this fis­cal. Given the pres­sure on yields, abil­ity to man­age op­er­at­ing and credit costs will de­ter­mine busi­ness sus­tain­abil­ity over the medium term.

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