More property loans turn bad as NBFCs up lending

Facing stiff competition from banks, leading non-banking finance companies (NBFCs) are disregarding risk mitigation practices while lending money. This has led to a rise in bad loans against property (LAP).

Facing stiff competition from banks, leading non-banking finance companies (NBFCs) are disregarding risk mitigation practices while lending money. This has led to a rise in bad loans against property (LAP).

Property loans should be disbursed on the basis of the borrower’s cash flow, said bank officials. (HT Archive)

Bankers said these loans, which are cheaper and easier to process, drove growth for the NBFCs. So far about ₹2.5 lakh crore has been lent, with property valuation being outsourced to a third party in most cases.

According to bank officials, loans should be made on the basis of the borrower’s (mostly small and medium businesses) cash flows. “Basically institutions are not lending on the basis of the borrower’s creditworthiness and repayment capacity, but on the property’s valuation. Some banks and NBFCs have gone overboard in lending without checking the credibility,” said Rajnish Kumar, managing director at State Bank of India.

Analysts say stagnant property prices, especially in metros, which are the primary markets for medium and large ticket LAPs, and a squeeze on refinancing due to risk aversion has strained the market. Yields are shrinking and credit costs are going up, says India Ratings.

Also, non-residential properties, including industrial, commercial, freehold land and unoccupied residential property, are increasingly being accepted as collateral. This proportion is as high as 30% of the portfolio for some firms. The realisation on liquidation is lower for these properties.

“One has to be watchful of loans against property. Lending against no cash flow can be risky. If a businessman mortgages any property and if you lend 70-75% against it without knowing how he will repay, it is risky,” says Keki Mistry, vice-chairman of HDFC.