Rise in delinquencies in LAP affecting non-banks
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.