Banks and NBFCs have been selling loans against portfolio (LAP) to asset reconstruction companies (ARCs) as small traders and businessmen who had mortgaged their properties are finding it difficult to service their loans.
The liquidity trouble for these small businesses started after demonetisation and GST as economic growth fell subsequently. Covid-19 outbreak and the second wave have created more trouble. "There are unusually high inflows of LAP portfolio from NBFCs," admits a senior official of a leading ARC.
Some suggest that the NBFCs, especially new-age NBFCs including fintechs, were very aggressive in onboarding customers in the last 2-3 years. Many of these new-age players were using cash flow statements or GST data to give loans over and above the security pledged at an enterprise level. The new differentiated banks, the Small Finance Banks, and the full-scale banks with MSME focus, were also building the LAP portfolio.
The estimated LAP portfolio of banks and NBFCs is over Rs 6 lakh crore. Bankers suggest the gross NPAs in the LAP portfolio would be around 5 percent. The actual stress is hidden because of moratorium, guarantees, and loan restructuring.
In the last few years, the LAP has emerged as a new resource-raising route in the market. These loans are generally used for working capital needs.
According to ARC officials, the lenders were quite aggressive in lowering interest rates for LAP customers due to high competition. In fact, the loan to value was also on higher side in some cases. These facts are coming out as banks and NBFCs engage with ARCs to sell LAP portfolio.
The lenders are also realising issues like improper valuation.
The lenders had followed a relaxed approach in credit and business model assessment despite the downswing in economy in last few years. MSMEs and small businesses are the hardest hit on account of the slowdown. But the Covid-19 outbreak has also impacted new segments like services sector.
Many banks also ignored possibility of a second wave and local lockdowns. These banks were quite liberal in dolling out loans by way of government guarantees and revival of demand in 2021-22