Is due diligence lacking in home finance?


The home loan sector brings together multifaceted & multi-sector issues that are driven by continuously fluctuating features, be it the country’s legal and cultural setup, economic conditions, political scenario and other regulatory policies. Ranjeet Kumar MishraChief Credit Officer, ART Housing Finance writes. 

In the financial sector, housing finance is relatively a new concept as the government took interest in the last two decades to diminish the housing problem in India. However, the participation of banks and financial institutions in the housing credit sector has swelled and the sector itself has evolved over the years, fuelled also by the concurrent evolution in government regulations in the sector and real estate industry as a whole.

This year’s interim budget extended the benefits of Section 80-IBA of the Income Tax Act till 31 March 2020 which will enable developers to enjoy 100% profit deductions from the development of affordable housing projects.

Affordable housing is likely to benefit from this proposal. Besides, the taxability of property held as stock in trade has been waived for a period of two years from the receipt of the certificate of completion of the property. This will provide further relief to the cash strapped developers, particularly with sales being slow due to the liquidity crunch in the economy.

What is driving the evolution?

In the current scenario, customers expect banks and financial institutes to offer customized and personized products, user-friendly and quick loan services in a completely digital way as it happens in the travel, retail and hospitality industry.

The trend is now moving from lengthy paperwork to more digitized processes and KYC documents. In order to keep up with the trend, home loan providers had to modify their approach and strategy in order to streamline their product offerings and update processes with an overall objective of delivering seamless customer experience.

Speed and reliability are always high on the customers’ agendas, so financial institutions need to use capabilities like inclusive credit scorecards (incorporating non-traditional data sources), analytics-based decision making, workflow-based automated processing & self-servicing to ensure that their customers enjoy an effective and valued experience. 

Housing finance now has evolved beyond the tier 1 cities into the Indian hinterlands, thus making scalability, dexterity & digital connectivity key cogs in their service wheel. As competition becomes more and more cutthroat, minimizing set-up & working costs is no longer an option but a priority. No wonder banks and NBFCs operating in the housing finance sector is fast adapting to changing consumption patterns and customer expectations. Organizations across the world have recognized the importance of this adaptability and have transformed successfully to be future ready.

The liquidity crisis hitting the housing finance companies (HFCs) is unlikely to improve much in FY20. The 13-15% credit growth of FY19 can slightly increase to 14-16% in the next fiscal year. The increase in the stock of repossessed assets and their low salability has elongated the recovery time. 

Gross non-performing assets (NPAs) of the home loan segment will increase up to 1.3% in the medium term from the present 1% levels, which can further go up to 1.8% if we include project loans.  HFCs are strictly limiting their disbursements and resorting to portfolio sell-downs in attempts to address the liquidity crunch.

The rise in non-performing assets of banks and financial institutions has raised the question regarding the adequacy of due diligence in their loan disbursal processes. This observation has also been reiterated by the RBI as well. For banks and NBFC, due diligence is required in credit appraisals and post sanction loan monitoring systems to mitigate NPAs.

Due diligence while on-boarding

The first stumbling block in due diligence is the risk of getting the documents under-reviewed and being taken at face value. It is important and imperative for credit personnel to review and do the proper due diligence of the background of the borrower. 

During the due diligence, it is also important to ensure the sanctity of the audit report and ensure that auditors and borrowers are not unduly favouring each other. It is not a surprise therefore that auditor independence check is being put into practice in today’s world.

Apart from an insurance cover and ‘no objection’ certificates obtained from other banks; financial companies can engage in further due diligence in the pre-disbursement stage itself. Review of the nexus of the borrower with other parties, analysis of undisclosed related parties and auditor independent checks, can prove to be insightful in checking the credibility of the applicant.

Due diligence while sanctioning

Due diligence of the promoter’s background is an important activity and at a time when continuous monitoring by the regulators is a norm, a quick review of the background of the borrowing party is of paramount importance. Loans sanctioned during period ends pose an even greater risk due to the book closing haste and therefore calls for greater stress on proper due diligence.

Valuation of collateral is also crucial in safeguarding the bank against loan defaults. Considering the market value instead of the book value is a conservative approach that ensures that the bank doesn’t lose out on overvaluation. In fact, the valuation of the collateral by an independent agency adds authenticity to the evaluation process. However, the bank still has to verify the “independence” of the agency and ensure that there is no unholy alliance with the loan applicant.

While it is important to pay heed to emerge trends such as artificial intelligence, machine learning, and reliance on non-traditional data points (small data) and keep up with industry practices, safeguarding its own interests should always be important to the lender. And this is where the importance of a robust due diligence and disbursal mechanism comes into play.

Digitized loan life cycle workflow and decision making is helping lenders to reduce cost and fraud in big way while creating the reach data in house for further fine tuning of credit decision and cost reduction. Lending to underserve segment or Bharat will be achieved through robust digital lending platform while keeping risk and reward equation in mind all the time by lender.

Deep penetration of digital India helping lenders in decoding the digital footprint of mass population including the barefoot entrepreneurs which is a large untapped pool from lending perspective. 

Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.  

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