The report states that lenders are more wary of extending LAPs as small and medium enterprises (SME) are seeing a subdued environment.
Defaults in India’s loan-against-property (LAP) segment may increase next year, but it may not hurt lenders greatly, said a Moody’s Investors Service report on Tuesday.
The report states lenders are more wary of extending LAPs as small and medium enterprises (SME) are seeing a subdued environment.
A Mint report said SMEs normally pledge their immovable property as collateral, which is why lenders categorize LAP as SME loans.
The rollout of the goods and services tax (GST) and demonetisation would also affect the ability of SMEs to repay with the additional tax payments.
“Many SMEs in India have traditionally operated outside the auspices of tax authorities. With the implementation of GST and demonetisation, many more SMEs will come under the ambit of tax authorities and will have to pay tax for the first time, in addition to bearing associated compliance costs,” it said.
Also, tighter underwriting standards and asset-backed securities (ABS) with LAP as the underlying asset, are expected to have a loan-to-value (LTV) ratio of 40-50 percent next year.
According to the Moody’s report, “Although property prices have continued to increase, year-on-year growth rates have moderated from the higher levels of 2015 and 2016 and this has also led lenders to tighten underwriting standards over the past year. As noted, we expect property prices to remain steady at around current levels in 2018.”.The LTV is a ratio of the loan amount provided by the lender, against the value of the asset (typically property) that is bought by the lender.Moody’s said LTV of 45-50 percent on average is a comfortable ration that would be less riskier for the lenders. “In addition, owner-occupied residential properties are the main type of collateral, providing borrowers with a strong incentive to avoid default,” it said