Lap Leap of Non Banks Presentation New
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x
t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
The LAP Leap of Non-banks : Potential Hurd les Ahead?
Pawan Agrawal
Chief Analytical Officer
CRISIL Ratings
July 1, 2015
1
Hosted by:
Manish Saraf
Associate Director
CRISIL Ratings
Rupali Shanker
Director
CRISIL Ratings
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x
t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
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
– 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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F o r I n t e r n a l U s e O n l y –
N o t F o r E x
t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
LAP on a roll, healthy growth to continue
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
LAP AUM to reach Rs 5.0 lakh crore by March 2019
4
AUM of banks and non-banks continues to witness healthy growth
Lenders’ preference for secured financing; slower growth in other segments
‒ Further, stable property prices have provided comfort
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
Source: CRISIL Estimates
1.3 1.72.3 2.7
5.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Mar-13 Mar-14 Mar-15 Mar-16 (P) Mar-19 (P)
( R s
l a k h c r o r e
)
4-year CAGR: 22%3-year CAGR: 30%
/ /
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Non-banks have helped in scale-up of LAP business
5
Non-banks expected to gain market share…
Non-banks have popularised LAP by offering differentiated value proposition
LAP will also remain a focus area for top private sector and foreign banks
Public-sector banks expected to grow at a slower pace
Source: CRISIL Estimates
…their growth will remain higher
36
39
32
24
44
33 32
28
24
2825
23
15
20
25
30
35
40
45
50
2012-13 2013-14 2014-15 2015-16 (P)
%
NBFCs HFCs Banks
52 50 49 49 45
26 28 29 29 31
21 22 22 23 24
1.3 1.7 2.3 2.7 5.0
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
0
20
40
60
80
100
120
Mar-13 Mar-14 Mar-15 Mar-16 (P) Mar-19 (P)
%
Banks NBFCs HFCs Total LAP AUM (Rs. Lakh Crore)
/ /
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Business dynamics changing for non-banks,
as competition intensifies
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Total LAP AUM for non -banks (Rs lakh crore) Numb er of players with AUM > Rs 1,000 crore
1.20.60.2
March 2010 March 2013 March 2015
6 players 16 players 23 players
Evolving market landscape for non-banks
7
Business opportunity has meant more large-sized players trooping in
Source: CRISIL EstimatesGrowth accelerating in smaller cities
Source: CRISIL Estimates
High share of intermediaries in disbursements
9075
65
1025
35
0
25
50
75
100
Mar-10 Mar-13 Mar-15
%
Metro and Tier I cities Tier II
5060
70
5040
30
0
25
50
75
100
2009-10 2012-13 2014-15
%
Third party intermediaries In-House
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N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Competition forcing non-banks to take more risks
8
Source: CRISIL EstimatesRising median ticket sizes
Source: CRISIL Estimates
Increasing share of commercial property
Increasing LTV on new lending Declining yields on new lending
~40-45
~50-60~60-70
0
25
50
75
100
2009-10 2012-13 2014-15
%
85 8070
15 2030
0
25
50
75
100
2009-10 2012-13 2014-15
%
Residential Commercial
0.5
0.91.2
0.0
0.3
0.6
0.9
1.2
1.5
2009-10 2012-13 2014-15
( R s c r o r e
)
16-17%15-16%
13-15%
10
12
14
16
18
20
2009-10 2012-13 2014-15
%
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Asset quality remains susceptible to rising
risks
9
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Lagged delinquencies reflect increasing risks
10
Delinquencies in LAP materially more than home loans
2-year lagged delinquencies in LAP almost 3x that of home loans
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
Source: CRISIL Estimates for non-banks
0.8
1.41.7
2.01.9
2.7
3.03.3
1.1
1.1
1.01.1
0.4
0.9
1.4
1.9
2.4
2.9
3.4
3.9
Mar-13 Mar-14 Mar-15 Mar-16 (P)
%
90+ dpd (LAP) 2 year lagged 90+ dpd (LAP) 2 year lagged 90+ dpd (Home Loans)
2 year lagged delinquencies = 90+ dpd (t) / AUM (t-2)
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
CRISIL’s risk continuum for major retail asset
classes
11
High Risk Medium Risk Low Risk
Two-
wheelers
New-car
loans
Home
loans
Gold
loans
LAS
Used-car
loans
New CV
Tractor
CESMEThree-
wheelers
Consumer
durables
Credit
cards
Personal
loans
Used CVsLAP
In the increasing order of risk
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
For LAP, risks building under the surface
12
S.No Risk factor Implications Risk Zone
1 High balance transfer Low seasoning of portfolio
Lower borrower equity
2Higher LTV coupled with high ticket
size Adverse impact on recovery in case of stress
3 Non-standardised property valuation Over-valuation may lead to higher exposure
4
Increasing proportion of commercial
property
Higher risk in assessing property value
Lower emotional attachment
5 Cash-flow based assessment Ability of lender to adequately factor in assessed
income
6 Post-default recovery challenges Currently, long and tedious process
However, access to SARFAESI to help
7 Lack of end-use monitoring
Possible stress on asset quality in slowdown
8 Sharp fall in property prices Situation of market-wide stress is rare
9 Regulatory environment Possibility of regulatory tightening/enhanced disclosures
High Risk Medium Risk Low Risk
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Balance transfers camouflage true asset quality
13
Higher pre-payment rates for LAP in CRISIL-rated mortgage pools
On average, ~30% of outstanding portfolio gets churned among lenders in a year
‒ Re-leveraging for the borrower
‒ Lower-than-optimal borrower equity
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
14
26
37
9
16
27
0
10
20
30
40
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
P r e p a y m e n
t R a
t e ( %
)
Months post secur i t isat ion
LAP pools Home Loan pools
High Risk Medium Risk Low Risk
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F o r I n t e r n a l U s e O n l y –
N o t F o r E x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Underwriting practices that are leading to risks (1/2)
14
Increase in share of higher LTV and ticket sizes
Around one-third of the portfolio is in large ticket size or high LTV categories
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
Source: CRISIL Estimates
LTV
Ticket size (Rs.)< 50% 50% - 65% > 65%
<50 lakh
~65% ~15%50 lakh – 1 crore
1 crore – 2 crore
> 2 crore ~15% ~5%
High Risk Medium Risk Low Risk
Lack of standardised property assessment practices
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F o r I n t e r n a l U s e O n l y –
N o t F o r E
x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Underwriting practices that are leading to risks (2/2)
15
Increasing share of commercial property as collateral
Funding against commercial property leads to:
‒ 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 Low Risk
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F o r I n t e r n a l U s e O n l y –
N o t F o r E
x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r i g h t s r e s e r v e d .
Potential risks after disbursements
16
End-use monitoring
End-use monitoring needs to be enhancedsignificantly
‒ Probability of higher stress in cases where
end-use of funds is not for business use
‒ Potential fund diversion to finance
promoter’s personal investments in real
estate and capital markets
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
However, recent decline in some micro-markets have raised caution
High Risk Medium Risk Low Risk
Challenges in post-default recovery
Unlike other retail assets, property isrelatively less liquid
‒ Involves higher cost and longer resolution
time, especially for high value properties
‒ Higher cash component in real estate deals
constrains lender’s ability to sell property
Access to SARFAESI will help improverecovery process
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F o r I n t e r n a l U s e O n l y –
N o t F o r E
x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r
i g h t s r e s e r v e d .
LAP to remain among the most profitable
asset classes
17
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F o r I n t e r n a l U s e O n l y –
N o t F o r E
x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r
i g h t s r e s e r v e d .
Profitability to remain healthy, but likely to moderate
18
Increasing competition and higher borrowing costs have impacted margins
‒ Yields to decline further, settle at ~12.5 –13.5%
‒ Lenders targeting newer borrowers and geographies to partly mitigate pressure on yields
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
Source: CRISIL Estimates
* Net interest margin = (Total income –
Interest expense) / Average assets
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%
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F o r I n t e r n a l U s e O n l y –
N o t F o r E
x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r
i g h t s r e s e r v e d .
LAP remains among most the profitable asset classes
19
Source: CRISIL EstimatesRoA: Gold finance business
RoA: Return on assets; RoMA: Return on managed assets; on a steady state basis through the cycle
RoA: Home loans business
RoA: LAP business RoMA: Vehicle finance business
Source: CRISIL Estimates
5.3%
2.5%
2.5%
1.1% 0.6%
1.1%
0%
2%
3%
5%
6%
8%
9%
NIM Opex Credit Cost Tax Post-TaxRoA
6.4%
2.2%
2.2%
2.2%
1.0%1.0%
0%
2%
3%
5%
6%
8%
9%
0%1%2%3%4%5%6%7%8%9%
10%11%12%13%14%15%16%17%18%19%20%21%22%23%24%25%26%27%28%29%30%31%32%33%34%35%36%37%38%39%40%41%42%43%44%45%46%47%48%49%50%51%52%53%54%55%56%57%58%59%60%61%62%63%64%65%66%67%68%69%70%71%72%73%74%75%76%77%78%79%80%81%82%83%84%85%86%87%88%89%90%91%92%
93%94%95%96%97%98%99%
100%
NIM Opex Credit Cost Tax Post-Tax
RoMA
8.7%
2.59%
2.6%
4.5%
0.5%
1.1%
0%
2%
3%
5%6%
8%
9%
NIM Opex Credit Cost Tax Post-TaxRoA
3.0% 2.4% 2.3% 1.6%
1.6%0.6% 0.2% 0.7%
0%
2%
3%
5%
6%
8%
9%
0%
1%
2%
3%
NIM Opex Credit Cost Tax Post TaxRoA
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F o r I n t e r n a l U s e O n l y –
N o t F o r E
x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r
i g h t s r e s e r v e d .
Conclusion
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
20
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F o r I n t e r n a l U s e O n l y –
N o t F o r E
x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r
i g h t s r e s e r v e d .
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F o r I n t e r n a l U s e O n l y –
N o t F o r E
x t e r n a l D i s t r i b u t i o n
© 2 0 1 4 C R I S I L L t d .
A l l r
i g h t s r e s e r v e d .
Business model among market participants
Particulars Non-banks Private/Foreign banks Public-sector banks
End-use of Funds As term loan for business or
debt consolidation
Other purposes like
investment, etc
As term loan for business As term loan for business
(or long-term working capitalloan in some cases)
Credit Assessment Customised assessment
based on understanding of
borrower cash flows
Primarily based on
documented income of
borrower; some proportion
based on customisedassessment
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