Loans with a high ticket size (greater than equal to INR10 million), a high internal rate of return (IRR) (greater than 14.0%) and a high loan tenor (greater than 10 years) were observed to have a relatively high default rate in an analysis of a sample set of retail loans against property (LAP) conducted by India Ratings and Research (Ind-Ra). Salaried borrowers have historically performed significantly better than self-employed borrowers, both in formal and informal sectors. In addition, the origination practices of direct sales agents were observed to have been relatively inferior to those of the in-house sales teams of LAP originators.

Ind-Ra has analysed the detailed static pool with loan-level characteristics of a sample of retail LAP originated by non-banking financial companies. The sample comprises nearly 16,000 loans equivalent to INR77.4 billion of total future receivables at the time of the initial disbursement. The agency analysed the key asset characteristics of loans disbursed during FY14-FY18, in addition to the default patterns of loan tenor, interest rate, loan ticket size, loan-to-value (LTV) ratio, occupation, customer category and source agent type.

For the purpose of the analysis, Ind-Ra has considered the average peak 90+ days past due (dpd) as the delinquency rate.


Loans With High LTV and Ticket Size Pose High Default Risk: Loans with an LTV ratio greater than 60.0% were observed to have a delinquency rate of 6.62% compared with a low delinquency rate of 4.31% for loans with an LTV ratio no more than 60.0%. High LTV loans are susceptible to more defaults, given there is low equity participation from borrowers, which act as the first line of protection against intentional delinquencies. Also, the valuations of mortgaged properties are market-linked and tend to significantly decline during times of stress.

Furthermore, Ind-Ra observed that the delinquency rate of loans with a ticket size of at least INR10 million was almost 2.0x higher than that of loans with a ticket size less than INR10 million. A high default risk on increased leverage is a common phenomenon, and originators typically mitigate this risk through robust underwriting practices such as stipulation of low LTVs and monitoring a borrower’s sustainable income capacity and debt servicing ability during loan tenor.



Performance of Loans With Short Tenor (<= 10 years) and Low Interest Rate (<=14.0%) Relatively Better: The sample of retail LAP highlights that short-tenor loans with a scheduled maturity at most 10 years exhibit a delinquency rate of 5.66%, which is considerably lower than the 8.05% rate for long-tenor loans with an original maturity beyond 10 years. Long-tenor loans are typically more vulnerable to defaults in view of relatively high volatility of borrower cash flows.

An analysis of the interest rate of the sample retail LAP pool indicates that loans priced higher than 14.0% per annum (p.a.) are risky compared with loans with an IRR no more than 14.0%. However, the relatively high default risk of high IRR loans (>14%) is generally compensated by the higher pricing of the loans in this segment.

Figure 3
Default Pattern by Interest Rate

Interest rate

> 14%

<= 14%

Delinquency rate

8.69%

6.72%

Source: Ind-Ra

 

Ind-Ra also analysed the two-dimensional default distribution pattern of the sample portfolio by studying its dependence on interest rate and loan ticket size. Loans with an IRR of at least 14.0% p.a. and a ticket size of at least INR10 million have an average peak default of 11.3%. The level is double the average peak default observed for loans with a low ticket size (less than INR10 million) and a low IRR (less than 14% p.a.).

According to Ind-Ra’s analysis of the sample pool, LAP with a disbursed amount of at least INR10 million or above have indicated relatively high defaults. The agency believes the high defaults can be arrested by the presence of a separate set of robust underwriting norms for loans disbursed at a high ticket size. Some key distinguishing credit appraisal parameters include availability of at least two independent property valuers securing loan, independent assessment of borrower cash flows and stipulations of low LTV for high ticket-sized loans compared with average LTV for loans with financed amount below INR10 million. The recovery prospects of high ticket-sized LAP post default are generally low, as high-value mortgages that secure these loans turn out relatively illiquid during default.


Self-Employed Borrower Profile Riskier Compared with Salaried Borrower Profile: Salaried borrowers have performed relatively better than self-employed borrowers as the former category has income stability. In addition, salaried customers consistently performed better than self-employed customers in both formal and informal sectors, indicating the relatively better income sustainability of the former.


Figure 8
Default Pattern by Borrower Type

Borrower type

Self-employed

Salaried

Delinquency rate

7.80%

6.20%

Source: Ind-Ra

 

In-House Sales Team Originates Better Credit Quality Loans: Loans originated during FY14-FY17 through direct sales agents  registered a delinquency rate of 7.81%, 100bp higher than  that of loans originated directly through in-house sales teams. In-house sales teams have a relatively better control on sourcing practices compared with direct sales agents who handle loan sourcing to multiple originators simultaneously. Hence, the latter generally tend to compromise on loan credit quality.

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Analyst Names

  • Arijeet Maji

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40001704

    Jinesh Rajpara

    Analyst
    +91 22 40356114

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    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121