Loan against property turning sour here?s how to tackle it.

Posted by Anurag Mishra on May 23rd, 2017

A report by India Ratings (Ind-Ra) shows a worrying trend: defaults on loan against property (LAP) are at their highest level in 2016, compared to the last five years. These delinquencies, between zero and under-2% during 2011-13, are now at 5% or more for most lenders, mainly banks and non-banking finance companies (NBFCs). These are already feeling the pressure of mounting bad debt from corporate borrowers. The Ind-Ra findings are significant: one, delinquencies are rising whatever the year of origin of Loan against property. Two, around half of all defaults come from high-ticket borrowers, with an exposure of Rs 50 lakh or more; the smallest ones, borrowing Rs 20 lakh or less, are best behaved. Three, most defaults are concentrated in metros and large cities, where a long property bubble is now deflating. Finally, the data goes back five years, enough time to indicate a trend.

The Loan against property market’s growth was driven by a bubble, which turned the heads of property owners as they saw the notional values of their holdings soar, borrowing more on the back of these unreal values. Lenders jostled with each other to play along: instead of accepting relatively stable residential property, they took on commercial or business establishments, even freehold land, as collateral. Now, if the Loan against property market goes belly up, it could impact credit across retail, property and corporate segments. At best, it could make lenders more risk averse and circumspect about funding; at worst, it could freeze overall credit and growth. The government and Reserve Bank of India must act fast to prevent a replay of the US subprime mortgage crisis in India. The property bubble must be allowed to deflate on its own; it will do so. Regulators must step in: LPAs must be scrutinized and collateral and margin norms tightened. Credit recovery might be tough or messy, so assets underlying Loan against property should be bundled into a recovery pool, which can be auctioned off at prices the market can afford. The government should not go into bailout mode. Early action, with haircuts and rational pricing, should suffice.

{Source: http://blogs.economictimes.indiatimes.com/et-editorials/loans-against-property-turning-sour-heres-how-to-tackle-it/}

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Anurag Mishra

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Anurag Mishra
Joined: December 13th, 2016
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