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Pawan Agrawal

Rupali Shanker

Manish Saraf

Chief Analytical Officer

Director

Associate Director

CRISIL Ratings

CRISIL Ratings

CRISIL Ratings

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The LAP Leap of Non-banks : Potential Hurdles Ahead?

July 1, 2015

Key messages

Loans against property (LAP) on a roll, healthy growth to continue

Assets under management (AUM) will double to Rs.5.0 lakh crore by


March 2019 from Rs.2.3 lakh crore as on March 2015

Non-banks (NBFCs and HFCs) will continue to grow faster than banks

Business dynamics changing for non-banks as competition intensifies

Increasing appetite for higher loan-to-value (LTV), and bigger ticket-size loans

Pricing is under pressure, and yields are declining on incremental business

Asset quality remains susceptible to rising risks

Lagged delinquencies reached 3.0% as on March 2015, from 1.9% two years ago

Higher balance transfers resulting in lower repayment track record

Lack of standardised valuation practices

LAP to remain among the most profitable asset classes

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RoA of 3.2% for 2014-15; expected to hover at 2.5% over medium term

However, lenders need to be cautious

Greater discipline in credit practices will be the key to continued success


2

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LAP on a roll, healthy growth to continue

LAP AUM to reach Rs 5.0 lakh crore by March 2019


AUM of banks and non-banks continues to witness healthy growth
6.0

3-year CAGR: 30%

4-year CAGR: 22%

4.0
3.0

5.0
2.0
1.0

1.3

1.7

Mar-13

Mar-14

2.3

2.7

Mar-15

Mar-16 (P)

//

0.0

Mar-19 (P)

Source: CRISIL Estimates

Lenders preference for secured financing; slower growth in other segments

Further, stable property prices have provided comfort

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(Rs lakh crore)

5.0

For borrowers, LAP enables greater monetisation of property

Increased loan amount and longer tenures are the primary benefits

Large market opportunity to help sustain LAP growth

~Rs.10 lakh crore of bank loans in the Rs.25 lakh - Rs.10 crore ticket size offers vast potential

Un-banked SMEs in Tier-II and Tier-III towns also offer good business potential

Non-banks have helped in scale-up of LAP business


Non-banks expected to gain market share
1.3

1.7

2.3

5.0

2.7

0.0

21

22

22

23

26

28

29

29

24

39

40
-10.0

80
%

44
45

100

60

50
10.0

35

-20.0

31

36

32

33

32

30

28

-30.0

40

25

20

52

50

49

45
//

Mar-13
Banks

49

NBFCs

Mar-14
HFCs

Mar-15

-50.0

-60.0

20

24

28

-40.0

25

24

23

15

Mar-16 (P) Mar-19 (P)

Total LAP AUM (Rs. Lakh Crore)

2012-13

2013-14

NBFCs

2014-15
HFCs

Source: CRISIL Estimates

Non-banks have popularised LAP by offering differentiated value proposition

2015-16 (P)
Banks

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120

their growth will remain higher

LAP will also remain a focus area for top private sector and foreign banks
Public-sector banks expected to grow at a slower pace

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Business dynamics changing for non-banks,


as competition intensifies

Evolving market landscape for non-banks

0.2

0.6

1.2

6 players

16 players

23 players

March 2010

March 2013

March 2015

Total LAP AUM for non-banks (Rs lakh crore)

Growth accelerating in smaller cities

Source: CRISIL Estimates

100

10

Number of players with AUM > Rs 1,000 crore

High share of intermediaries in disbursements


100

25

35

75

40

30

50

60

70

50

75

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Business opportunity has meant more large-sized players trooping in

50

90

50

75

65

25

25
0

0
Mar-10
Mar-13
Metro and Tier I cities

Mar-15
Tier II

2009-10
2012-13
Third party intermediaries

2014-15
In-House

Source: CRISIL Estimates

Competition forcing non-banks to take more risks


Increasing LTV on new lending

Declining yields on new lending

100

20

~50-60
50

18

~60-70

~40-45

16-17%
15-16%

16

13-15%
14

25

12

10
2009-10

2012-13

2014-15

2009-10

Rising median ticket sizes

100

1.2

75

0.9

(Rs crore)

1.5

1.2
0.9

0.3

0.5

50

15

20

30

85

80

70

2009-10

2012-13

2014-15

25
0

0.0
2009-10

2014-15

Increasing share of commercial property

Source: CRISIL Estimates

0.6

2012-13

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75

2012-13

2014-15

Residential

Commercial

Source: CRISIL Estimates

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Asset quality remains susceptible to rising


risks

Lagged delinquencies reflect increasing risks


Delinquencies in LAP materially more than home loans
3.9

3.3

3.4

3.0

2.4
1.9
1.4
0.9

2.0

1.9

1.7
1.4
1.0

1.1
0.8

1.1

1.1

0.4
Mar-13
90+ dpd (LAP)

Mar-14

Mar-15

2 year lagged 90+ dpd (LAP)

Mar-16 (P)

2 year lagged 90+ dpd (Home Loans)

Source: CRISIL Estimates for non-banks

2-year lagged delinquencies in LAP almost 3x that of home loans

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2.7

2.9

Delinquencies trending towards that of SME portfolio of banks

90+ dpd in banks SME portfolio crossed 5% in 2014-15

However, delinquencies to remain lower given the property-backed nature of loans

2 year lagged delinquencies = 90+ dpd (t) / AUM (t-2)

10

Home
loans

New-car
loans

LAP

LAS

Used CVs

Tractor

Twowheelers

Credit
cards

In the increasing order of risk

Gold
loans

High Risk

Used-car
loans

Medium Risk

New CV

SME

CE

Threewheelers

Consumer
durables

Personal
loans

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CRISILs risk continuum for major retail asset


classes

Low Risk

11

For LAP, risks building under the surface


S.No

Risk factor

High balance transfer

Higher LTV coupled with high ticket


size

Adverse impact on recovery in case of stress

Non-standardised property valuation

Over-valuation may lead to higher exposure

Increasing proportion of commercial


property

Higher risk in assessing property value

Cash-flow based assessment

Post-default recovery challenges

Lack of end-use monitoring

Possible stress on asset quality in slowdown

Sharp fall in property prices

Situation of market-wide stress is rare

Regulatory environment

Possibility of regulatory tightening/enhanced disclosures

High Risk

Implications

Medium Risk

Risk Zone

Low seasoning of portfolio

Lower emotional attachment


Ability of lender to adequately factor in assessed
income
Currently, long and tedious process
However, access to SARFAESI to help

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Lower borrower equity

Low Risk

12

Balance transfers camouflage true asset quality

37

40
26

30
20

27

14

10

16
9

0
1

8
9
10
11
12
Months post securitisation

LAP pools

13

14

15

Home Loan pools

On average, ~30% of outstanding portfolio gets churned among lenders in a year

Re-leveraging for the borrower

Lower-than-optimal borrower equity

16

17

18

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Prepayment Rate (%)

Higher pre-payment rates for LAP in CRISIL-rated mortgage pools

Leads to favourable terms for borrowers

Due to top-up and/ or lower interest rate from new lenders

Third-party intermediaries playing a larger role in balance transfers

High incentive for loan originations

High Risk

Medium Risk

Low Risk

13

Underwriting practices that are leading to risks (1/2)


Increase in share of higher LTV and ticket sizes
LTV

< 50%

50% - 65%

> 65%

<50 lakh

50 lakh 1 crore

~65%

~15%

~15%

~5%

1 crore 2 crore
> 2 crore

Around one-third of the portfolio is in large ticket size or high LTV categories
Source: CRISIL Estimates

Lack of standardised property assessment practices

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Ticket size (Rs.)

Improper valuation potentially distorts LTV and ability to price risk appropriately
Challenges arise from:

Scarcity of well-trained property valuers

Lack of reliable secondary market prices

Title search and verification process equally critical


High Risk

Medium Risk

Low Risk

14

Underwriting practices that are leading to risks (2/2)


Increasing share of commercial property as collateral

Longer recovery time in case of stress sale

Higher linkage to macroeconomic conditions

However, lower LTV compared with residential property provides greater comfort, for now

Adequacy of borrowers cash-flow assessment


Higher reliance on assessed income by non-banks compared with banks
Appropriate assessment of cash flows critical

High Risk

Medium Risk

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Funding against commercial property leads to:

Low Risk

15

Potential risks after disbursements


End-use monitoring

Challenges in post-default recovery


Unlike other retail assets, property is
relatively less liquid

Probability of higher stress in cases where


end-use of funds is not for business use

Involves higher cost and longer resolution


time, especially for high value properties

Potential fund diversion to finance


promoters personal investments in real
estate and capital markets

Higher cash component in real estate deals


constrains lenders ability to sell property

Access to SARFAESI will help improve


recovery process

Fall in property prices


Situation of market-wide stress is rare

Portfolio diversification across cities and penetration in Tier II / III cities will reduce risks

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End-use monitoring needs to be enhanced


significantly

However, recent decline in some micro-markets have raised caution

High Risk

Medium Risk

Low Risk

16

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LAP to remain among the most profitable


asset classes

17

2010-11

2014-15

2018-19 (Base case)

NIM *

7.8%

6.3%

5.3% + 0.30%

Opex

1.5%

1.3%

1.1% + 0.10%

Credit cost

0.2%

0.4%

0.6% + 0.20%

Post-tax RoA

4.2%

3.2%

2.5% + 0.20%

Source: CRISIL Estimates

Increasing competition and higher borrowing costs have impacted margins

Yields to decline further, settle at ~12.513.5%

Lenders targeting newer borrowers and geographies to partly mitigate pressure on yields

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Profitability to remain healthy, but likely to moderate

Operating efficiencies to improve going forward


Credit costs to rise as a result of portfolio seasoning and increasing risks

Any sharper increase in delinquencies (under stress case) will adversely impact profitability

* Net interest margin = (Total income Interest expense) / Average assets

18

LAP remains among most the profitable asset classes


RoA: LAP business

RoMA: Vehicle finance business

8%
6%
1.1%

5%
3%

0.6%

1.1%

5.3%

2%

2.5%

2.5%

100%
99%
98%
97%
96%
95%
94%
93%
92%
91%
90%
89%
88%
87%
86%
85%
84%
83%
82%
81%
80%
79%
78%
77%
76%
75%
74%
73%
72%
71%
70%
69%
68%
67%
66%
65%
64%
63%
62%
61%
60%
59%
58%
57%
56%
55%
54%
53%
52%
51%
50%
49%
48%
47%
46%
45%
44%
43%
42%
41%
40%
39%
38%
37%
36%
35%
34%
33%
32%
31%
30%
29%
28%
27%
26%
25%
24%
23%
22%
21%
20%
19%
18%
17%
16%
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%

0%

9%
8%

Opex

Credit Cost

Tax

5%

1.0%

6.4%

1.0%

2.2%

0%
Opex

Credit Cost

Tax

Post-Tax
RoA

RoA: Gold finance business

Post-Tax
RoMA

RoA: Home loans business

Source: CRISIL Estimates

9%

9%

8%

3%

8%

6%

4.5%

6%
5%

3%
2%

2.2%
NIM

NIM

6%

2.2%

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9%

2%

5%

0.5%

8.7%

1.1%

3%
2%

2.6%

2.59%
Opex

Credit Cost

Tax

0.2%

1%

0.7%

3.0%

2.4%

2.3%

1.6%

NIM

Opex

Credit Cost

Tax

1.6%

Post-Tax
RoA

RoA: Return on assets; RoMA: Return on managed assets; on a steady state basis through the cycle

3%
2%
0%

0%

0%
NIM

0.6%

Post Tax
RoA

Source: CRISIL Estimates

19

Healthy growth in LAP segment to continue, given large market opportunity

Profitability to remain healthy, despite moderation over medium term

Lenders need to be cautious of emerging risks, and should focus on

Controlling LTVs

properly assessing borrower cash-flows

practice stricter valuation regime, and

enhancing portfolio monitoring

Key monitorables

Ability to manage portfolio through weak property price cycles

Success in repossession and recovery from high ticket size properties

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Conclusion

20

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Business model among market participants

End-use of Funds

Non-banks
As term loan for business or
debt consolidation

Private/Foreign banks

Public-sector banks

As term loan for business

As term loan for business


(or long-term working capital
loan in some cases)

Other purposes like


investment, etc

Credit Assessment

Customised assessment
based on understanding of
borrower cash flows

Primarily based on
documented income of
borrower; some proportion
based on customised
assessment

Basic cash flow assessment


based only on documented
income

LTV

60-70%
(upto 75% in some cases)

50%-60%

50%-60%

Yield on Current
Disbursements

13.0% - 15.0%

11.5% - 13.0%

12.0% - 13.0%

Turnaround Time

7 days 15 days

~15 days

~15 days - 1 month


(relatively lower than SME
assessment cycle)

Origination

Largely through
intermediaries

Both branch-based and


through intermediaries

Largely branch-based

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Particulars

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