G BALACHANDAR | Published on April 04, 2018 | The Hindu Business Line
But delinquencies are also on the rise
CHENNAI: The share of home loans to THE self-employed has increased to a little less than a third of the overall housing loan portfolio of housing finance companies (HFCs) from one-fourth of the portfolio four years ago, points out a report of rating agency Crisil.
Primarily driven by the government impetus to affordable housing, there has been a big surge in the self-employed taking home loans. In the overall home loan portfolio of HFCs, the share of self-employed borrowers is about 30 per cent now when compared with about 20 per cent four years ago.
“Several initiatives of both the government and the regulator in the recent past have led to fast growth in home loans taken by the self-employed. We expect such mortgages to continue showing good growth because of the sharp focus of smaller HFCs and increasing interest of the larger ones,” said Krishnan Sitaraman, Senior Director, Crisil Ratings.
Loans to the self-employed segment have grown at a CAGR of about 33 per cent in the past four years, compared with 20 per cent for the overall home loan segment. Home loans outstanding in the self-employed segment are expected to have topped ₹2 lakh crore by the end of 2017-18. Though new, small and larger HFCs have been aggressively catering to the self-employed segment, banks are also strengthening their presence in the home loan segment due to subdued credit demand from corporates and asset quality pressures.
However, on the flipside, delinquencies are also rising in the self-employed segment. Gross non-performing assets (NPAs) in the segment are estimated to have inched up by 40 basis points to about 1.1 per cent by the end of 2017-18, compared with about 0.7 per cent a few years back. This trend, however, warrants caution because lending to the self-employed is largely based on assessed income. Additionally, a section of borrowers, who have a limited credit history or banking experience, are highly vulnerable to disruptions such as demonetisation, and see high volatility in cash flows in the event of exigency.
“The two-year lagged NPAs in the self-employed segment, at about 1.8 per cent, is much higher compared with about 0.6 per cent in the salaried segment, where the portfolio quality has remained largely stable over the years,” said Rama Patel, Director, Crisil Ratings.
Given that the self-employed segment is relatively riskier than the salaried segment, HFCs tend to demand higher yields to offset higher credit cost. Further, to surmount borrower data issues, HFCs are adopting practices such as offering lower loan-to-value ratio, higher in-house sourcing, and developing the expertise to assess un-documented income.
While financiers are adopting a risk-based pricing approach, long-term sustenance will depend on strong credit and underwriting practices, said the report.
PTI | Updated: Jan 9, 2018, 16:01 IST | Times of India
MUMBAI: Even as a lot of thrust is being given to the affordable housing segment, a report has flagged concerns about the growing delinquencies in this segment, which are expected to continue in 2018.
Competitive pressures and larger exposure to the self-employed are the prime reasons for the build-up of stress in the segment, a joint report by Moody’s and its domestic affiliate Icra said today.
“While asset quality is expected to remain stable in the traditional housing segment, delinquencies could further build up in the affordable segment in the calendar year of 2018,” Icra’s structured finances head Vibhor Mittal said.
In a note on asset backed securities (ABS) co-written with its parent Moody’s, the report said gross-nonperforming assets in the affordable housing segment have inched up to 1.8 per cent as of September 2017.
The average cum 90+ days past due level for affordable housing was nearly seven times the level observed for traditional housing loan pools, it said.
Going into the reasons for the higher stress in the low ticket size loans, Mittal said, “this would be driven by factors like intensifying competition– resulting in some easing in lending standards — and a higher share of lending to the self-employed segment.”
It can be noted that the Modi government is targeting to ensure that there is a house for all by 2022 and has provided a lot of incentives for the affordable housing segment, including making it as a priority sector lending for banks and huge interest subvention and direct cash subsidy.
However, housing loans continue to be seen as the best performing retail loan asset class in the country, demonstrating low and stable delinquencies over the years, in 2018, it said.
This is possible because of the underlying collateral, which is self-occupied residential property, absence of steep correction in property prices and moderate loan to value ratios, the report said.
Moody’s said the impact of demonetisation and the implementation of the goods and services tax (GST) will lead to higher delinquencies in ABS for loans against property (LAP) to small and medium enterprises.
“Introduction of a GST in July 2017 and demonetization have placed stress on the SME sector,” Icra’s assistant vice- president Dipanshu Rustagi said.
The report also said auto ABS-backed by commercial vehicles loans will remain stable on the back of healthy domestic economic growth.
Icra said the microlending segment is on a “road to resurgence” after the note-ban setback with an increase in repayment rates to 94 per cent in September from the low of 87 per cent seen during December 2016 during the peak of the note-ban move.
As self employed individuals do not get a fixed monthly income, they may face some challenges while accessing credit. However, if they remain compliant by filing their income tax returns, by repaying their existing loans on time and by keeping their account up to date, they stand a high chance of getting a loan.
Vineet Jain CEO – Loanstreet.in | MoneyControl.com
In a country like ours, we admire the self-employed and entrepreneurs. But a majority of them face difficulty in availing loans from various banks at some point of time or the other, as banks are more comfortable in approving loans for salaried individuals. Lenders have a lengthy process of diligence while dealing with a loan applicant who is self-employed. While no bank or NBFC would agree to such discrimination, there does exist a little gap of doubt over the credibility and sustenance of self-employed individuals for loan repayment. Although this does not mean that all self-employed borrowers will struggle to get finance, it simply implies that one might need to pay close attention to the following details which the lenders consider while processing loans:
1.Filing timely returns is necessary when it comes to income verification. Lenders tend to check the tax returns statements of the past two years to verify income. In fact, they take an average income of 24 months to validate a borrower’s loan. It is always better to submit income tax returns of more than two years so that it can help the bank ascertain the growth of the business in subsequent years.
2.In case a borrower’s business did not have a good financial year in one of the previous years, it is no reason to worry as banks often ignore that part and calculate the average earnings over a period of the last two years. So it is best to apply at a time when the business is doing well.
3.Being self-employed comes with the additional responsibility of managing one’s own accounts so it has to be done carefully. While applying for a home loan, a borrower must give a detailed statement of his/her current year’s profit and loss.
4.A borrower must ensure that all his/her accounts are up-to-date and managed well. He must take assistance from a certified financial planner or chartered accountant for the same. The current fiscal profit and loss statement can either make or break the deal for quite a few loans especially if seeking a home loan.
5.A borrower must give a detailed statement of his/her businesses’ profit and loss attested by a certified chartered account as it increases the chances of loan approval. It is always a good idea to use the regular bank with which majority of the official banking transactions are made. The chances of getting a loan approval are much higher here, as compared to seeking a loan with a new bank.
6.Without adequate taxable income, most lenders would refrain from doing business with a self- employed borrower. In this new age of regulation and responsible lending, lenders feel the pressure to confirm an applicant’s ability to meet minimal servicing requirements. They decide the loan eligibility of a borrower on the basis of his/her net profit, consider the business use of one’s home, add depletion and depreciation, and calculate the income. Hence, ask yourself questions like: ‘Without being able to borrow the money, how is this going to impact my ability to make the financial decisions I have planned? Am I saving more by not paying tax, or am I losing more by not being able to invest in a new property?’
Lenders find self-employed candidates with higher down payment on home buying, good amount of savings and a good CIBIL score clear winners for a loan. They also take those applicants seriously who prove to have a steady income and records to show their willingness to repay.
Eligibility assessment methodology is comprehensive and detailed for self- employed applicants and is also unique as there are multiple ways to do the same. Every lending institution will dig into the loan repayment capacity of the borrower before the former gives a nod. It is an evolved process that ensures that banks assess loan application right.
For salaried individuals
The net salary is taken as the base figure which is also their net disposable income. This amount signifies the maximum EMI outflow possible for the respective customer.
For instance, Mr Armaan earns Rs 10,000 per month. He repays a loan wherein he has an EMI of Rs 2000 per month. In this case, bank will account 40% of his salary towards lifestyle maintenance of Armaan. This leaves Armaan with gross disposable income of Rs 6000. Bank deducts EMI amount from gross disposable income and that leads to net disposable income of Rs 4000. Net disposable income is used to assess loan amount eligibility, and is a fairly simple and straight forward method.
For self employed individuals
Varied methods are used while assessing the financial position of a self employed individual. A salaried individual has the monthly income as the base. But in self-employed, annual income is considered, as monthly income is not fixed.
Following are the methods for assessing income for self-employed:-
1.Net profit – The net profit of the firm on an annual basis.
2.Gross turnover and industry margin– The base is gross annual turnover. Each lender has a pre-assigned industry margin specific to the segment under which the customer falls; which is used as a multiplier to the turnover to determine income.
3.Banking surrogate – This is another unique method of assessing net disposable income. One year banking behaviour of the customer is closely tracked to ascertain the average monthly bank balance. Here the net disposable income is the multiplier of average monthly balance of the respective customer.
4.Liquid income program -Under this method, the lenders appoint external agency CA to assess actual cash flow of the customer and use it to determine eligibility.
5.Repayment Track -This method is largely used for balance transfer cases. The customers’ existing EMI of the loan to be transferred as given a multiplier and is used for determining eligibility.
To summarize– there are varied methods available with the lender to grant loan to self-employed customers. The most important thing is to keep the accounts clean and do repayments in time. Assess the lender before he assesses you by choosing the right one. You can take help from your chartered account or use any online platform to judge the same.
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