Moody’s Investors Service on Friday stated the complete asset profile of property retail loan portfolio of banks is constant although risks are increasing in the non-traditional loan against property section. “Growth in loan against property (LAP) loans has outstripped overall retail credit growth in recent years, but moderately loose underwriting practices and a tightening in credit following India’s demonetization would interpret into higher asset quality risk,” Moody’s V-P and Senior Credit Officer Srikanth Vadlamani stated.
It stated it expects the impact on the banks’ overall asset quality to be limited by the relatively small size of the LAP portfolio. The US-based organization expects that the withdrawal of 500 and 1,000 rupee notes in early November 2016 may more expose the weaknesses in this section.
“Disturbances in the borrowers’ cash flows may cause crimes while retrenchment backing practices will make it more difficult for them to take out new debt,” it stated. Because LAP loans are naturally extended to SMEs and self-employed entities, a borrower’s capability to repay is often based on the lender’s assessment of the borrower’s income slightly than actual reported income, Moody’s stated.
Yet, Moody’s guesses that the stable performance of the much larger home loan segment will ease the negative impact, reinforced also by the country’s favorable demographics, rising primary market goods and an progressively affordable housing segment.
Non-bank finance firms with a higher disclosure to the non-traditional end of the market will get impacted more, Vadlamani added. Moody’s guesses the LAP section — comprising loans to small-and medium-sized enterprises (SMEs) for business drives with property as guarantee — to have grown at a compounded annual growth rate (CAGR) of 25% between 2012 and 2016, as against 17% for overall retail credit.
Though, the unique features of this borrower segment, mutual with rapid growth and increasing competition, are affectation risks to this section of bank loan portfolios, it stated. At the same time, the ready availability of credit has made it easy for mortgagors to refinance their debt, thereby possibly masking any wilting in their capability to repay the debt, it stated.