Shishir Asthana Moneycontrol Research
With the rise in non-performing assets (NPAs) in the banking sector, there was an almost complete clampdown in advances by banks who shied away from lending money to the corporate sector. However, most banks, especially in the private sector, increased their advances by focusing on personal and housing loans.
With their low cost of funds, banks were able to give housing finance companies a run for their money. Non-banking finance companies also entered the housing loan market as it was the only sector that showed growth at lower risk. As competition increased in the housing loan sector, banks increased their focus on another segment of housing finance called loan against property (LAP).
LAP is essentially using an existing property as mortgage to raise finance that can be used for some other purpose.
LAP became popular both among the business community and general public. For the business community, it gave them an alternate resource to raise funds at a time when banks were shying away to lend money. For the general public, it allowed them to utilise the money raised to either buy a second home or deploy it for other purposes as a LAP worked out to be cheaper than a personal loan.
An added advantage that LAP offered which made it popular is that as the price of the property which was mortgaged rose, it gave the borrower an opportunity to increase his borrowing. This feature made LAP a hit with the business community.
Various lenders were competing against each other to offer the maximum possible loan on the property, which in banking parlance is called Loan to Value (LTV) Ratio. A conservative lender gives loans to the extent of 50-55 percent of the value of the property, while an aggressive one goes up to 80 percent. In some cases, the valuation of the property has been known much higher than the price at which transactions have taken place.
So high was the popularity of LAP that exposure of NBFCs alone increased from Rs 43,000 in 2012 to Rs 1.48 lakh crore in March 2017. Taking cognizance of the growing popularity of the product and more importantly, the growing risk in this portfolio the National Housing Bank (NHB) is looking to cap the amount of loan that can be advanced.
Chairman of NHB, Sriram Kalyanaraman, is reported to have said that LAP in mostly high-value loans is based on commercial property which is not appreciating. While there is value on paper it might be difficult to repossess and sell it in case of a shock.
An ICRA report points out that LAP business of various entities has taken a hit post demonetisation. Growth in LAP in FY17 stood at 17 percent lower than 30 percent in FY16 and much lower than 70 percent in FY10. However, delinquencies have started to rise which has prompted NHB to raise the alarm.
But the repercussions of clamping on LAP can have an impact on the already slowing housing sales. More importantly, it will have a bigger impact on the growth of small and medium enterprises which have been relying on LAP to meet their short-term requirement of funds. Without LAP the SME segment, which has already been hit by GST and demonetisation will be gasping for breath.
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