Rising delinquencies in LAPs, and why you must know about it

Off late, reputed banks and financial institutions have seen a rise in the numbers of applications for Loan Against Property (LAP). These loans are distinct from home loans; in the latter, the applicant takes a loan to purchase a house, whereas in an LAP, the loan amount is given subject to the applicant mortgaging their owned property with a bank or financial institution.

Loans against property are rising steadily in the country – CRISIL estimates that the major banks and financial institutions offering LAPs expect a rise of 22% in this category in the coming years. But correspondingly, the risks in this sector are also rising. Financial institutions in the country are seen to offer more LAPs than banks, and customers also prefer to partner with them because they provide quick services and innovation in products. But a recent report by IND-RA contends that this loan sector is also seeing a very high number of delinquencies. In the year 2016, these are expected to rise to 5% of all cases studied in the country.

Delinquency in the loan is measured against the 90 days past due date factor – after which the lender may attach the property or initiate prosecution against the applicant. Two major reasons emerge for the high default rates: 1) Some lenders are outsourcing the property evaluation process to third parties, which may not be thorough with background checks. This is detrimental to the interests of the lender, and 2) In a bid to offer easier services, financial institutions are allowing faster loan applications and accommodating customers with a not-ideal credit score. There may come a time when the customer is unable to repay the loan EMIs, and the default process begins.

If one is taking a loan against property, one must ensure that:

·         The repayment capacity is quite strong.

·         There is no other avenue to raise funds except to take the loan against property.

·         The property is a freehold, unencumbered one.

·         The property may be sold to repay the loan against property in case of financial distress.

·         The lender has performed thorough background checks while offering the loan.

·         The rate of interest is suitable and acceptable to the applicant. The rate of interest on the LAP is normally higher than home loan interest rate. However, it is lower than interest charged on personal loan or credit card loan.

·         The lender is amenable to adjusting the EMI amount at a later date in response to rate fluctuations.