Loan Against Property (LAP) is an excellent source of harnessing financial backing for your business. It is constructive for entrepreneurs who have an inventory of innovative ideas but lack monetary support.

1. The Up And Coming Market of Loan Against Property
A business requires a financial boost on several occasions. It flourishes
only when it receives financial support during times of need. Anyone
would expect that support, especially when the business is in crisis or is
expanding.

2. Loan Against Property (LAP) is an excellent source of harnessing
financial backing for your business. It is constructive for entrepreneurs
who have an inventory of innovative ideas but lack monetary support.
Loan Against Property (LAP) is a relatively short tenor retail lending
product and is generally considered a higher credit risk product than
Home Loans. In India, LAP can be offered by banks and large, mid and
small-sized NBFCs.
Building a perfect fintech app for facilitating LAP is a challenge. There are
various questions to be addressed to create that final version that will
solve the problem of lending in the market.
We hosted Mr. Diwakar Pundir, a Finance veteran (Specialties in Credit &
Risk Management for Small & Mid-Sized Companies) in India, to discuss
the financial needs of LAP for their entrepreneurial pursuits. Here are a
few innovative ways to ensure that Loan Against Property (LAP) is used
effectively to achieve your business goals.
Diwakar: Looking at LAP as a product, it’s a large business opportunity
globally. It was the two HDFCs that were dominant in LAPs until Bajaj
Finance came in and took this product to new levels. One reason why
LAP really took off in India – property is one of the biggest asset classes
in collateral-based lending. Within mortgages, you have home loans and
LAP.

3. LAP – Product Parameters
For customers like self-employed people, SMEs, etc. who want to raise
capital by leveraging their property, LAP is a fantastic product! With that,
let me go into the presentation.
Diwakar: Broadly speaking, retail lending is divided into secured and
unsecured forms. Secured lending further branches out into:
● Asset-based: Auto loans, heavy-equipment loans, etc. where the
value of the asset is used to finance the loan. Shriram Finance,
Mahindra Finance, etc. specialize in this.
● Margin-based: Gold loans, Shares & Mutual Funds, Agri, FDs. Here
you look at the asset and give a certain proportion of the asset as a
loan. Eg. 65% of the value of gold is given as a loan.
● Cash Flow-based: Working capital financing, Term Loans, Home
Loans, Loan Against Property (LAP).
Unsecured lending is basically your personal loans, credit cards, business
loans, and microfinance – where again there is no underlying asset and is
purely cash-flow based.

4. Features of Cash-flow Based Lending
Diwakar: You can look at cash-flow-based lending products as unsecured
loans + collateral. The credit assessment is based on the borrower’s
ability to repay the loans in a timely manner, and these are relatively
longer-term loans.
The collateral must sufficiently cover the value of the loan with some
buffer, called the loan-to-value ratio. This is a crucial term in this type of
lending. In-home loans, you even have regulator guidelines regarding this
concept, and in LAPs, institutions don’t go beyond a 70% LTV ratio,
meaning that if the value of the collateral is Rs. 100, then the loan cannot
exceed Rs 70. The collateral can be tangible (eg. property, machinery,
etc.) or intangible (receivables, inventory).
While Home Loans (HL) are usually long-term (15 years plus) and have
floating interest rate structures, LAPs are shorter (max. 15 years) and can
have fixed or floating rates. In India, medium and small NBFCs can
restrict the loan tenor up to 10 years depending on the client segment,
since anything beyond this timeline can have an impact on their
asset-liability mismatch.

5. LAPs carry a higher credit risk because it’s a product for leveraging your
asset. Generally, both HL and LAP products have done brilliantly in India
in the past, however, the defaults rates in LAPs have been slightly higher
(around 3.5%) leading to their pricing being a little higher.
Question #1
Alex: You said the NPAs are higher for LAP products than Home Loans,
why is that?
Diwakar: So when you buy a house, it is for your consumption. You
borrow for the asset, and usually, you don’t default on the loan. Whereas
in LAPs, you borrow against the asset, leaning you leverage the collateral
to get your loan.
Whenever you leverage a product, the associated risk becomes higher. In
many cases, the buyer may not place much importance on the product.
They are ready to let go of the asset since it won’t harm their businesses.
Hence there is an increase in Non-Performing Assets (NPA) even if its
value is higher for LAP.

6. Question #2
Mani: You initially talked about margin lending where you have gold
loans, shares, etc. but LAPs come under cash-flow products. Similar to
gold, land value is also increasing, right? Meaning land value also keeps
appreciating the market trends, so why are LAPs classified under margin
lending?
Diwakar: That’s because the liquidation of the collateral is very difficult.
Vehicles, whether they’re used or new, and gold can be sold way easier
than homes. In fact, these two loan types are so highly data-driven, that
banks and NBFCs have built entire lending models around them. But it’s
not that easy to sell a property, since it’s a very large value product. It
becomes very difficult for institutions to auction off a pledged property
than a developer (eg. if the reserve price is Rs 1cr, the bids will start only
at Rs. 40lacs). Shares can be very large value as well, but shares are
funded only against the top 500 companies, and they are very liquid. The
LAP can be fixed at fixed or floating rate products with Loan-To-Value
(LTVs) generally limited to less than 50% of the loan for commercial
properties.
Question #3

7. Alex: So for any large value property which can be pledged for a LAP, the
LTV needs to be less than 50%?
Diwakar: No, that depends on the institution’s policy. If the loan amounts
are larger, then the quality of the borrower has to be better. Beyond Rs.
50cr or Rs. 100cr of exposure, companies may not have hard collateral
like property for LAP, but they would have soft collateral like inventories or
receivables.
LAP – Product Parameters
Parameter Details

8. Tenor 5 – 15 years
Repayment Usually, EMIs; larger NBFCs also offer LAP OD
nterest Rate
Fixed (short tenor) & Variable (usually for long tenor)
Collateral
Type
Residential, Commercial, Mixed-Use, Industrial Plot,
Self-Occupied, Leased, Vacant

9. LTVs Max 70% for residential, 60% for commercial, and 30-35%
for plots
Disbursemen
t
Can be done in multiple tranches, Balance Transfer is also
possible
Question #4
Ajith: How does interest work when NBFCs offer OD for LAP?
Diwakar: The interest works on a daily basis. NBFCs offer an overdraft
facility against your asset as collateral. An overdraft facility is also
provided for customers who require funds for settling their existing home
loan repayments.

10. In Loan Against Property (LAP), the property is assessed, evaluated, and
surveyed thoroughly before giving the house’s approval as collateral.
Hence, overdraft funds lent against property as collateral aren’t disbursed
with immediate effect. Your repayment capacity and credit history are also
considered while granting an overdraft against the asset as collateral. You
are liable to make the interest payment from the time (i.e., EMIs or equal
monthly installments) this LAP Overdraft (LAP-OD) is disbursed.
Diwakar: The complexity in LAP and Home Loans comes around the
collateral. Looking at the digital lending landscape of India, you’ll not find
much traction in the property segment. This is because the assessment of
property online is very difficult and also that property is a state subject
(eg. the complexity of getting a mortgage in Tamilnadu is very different
from that in Rajasthan). The documents required to disburse a LAP may
be different even within the state and a city. In HLs, you’re only looking at
residential properties, but in LAP you have a multitude of these, making
the assessment process even more challenging.
Collateral Underwriting in LAP
Diwakar: The biggest reasons for the complexity in LAPs arise from
collateral. Underwriting in LAPs is divided into 3 pivotal aspects as below:

11. 1. Technical: Comprises of property valuation, whether it has been
constructed in an authorized land, completeness of the project, location,
any deviations from plans, and occupancy. This is generally done by a
competent & trained person who is licensed to do valuations. Once done,
they will give a value for the property, which is almost a subjective one.
2. Legal: Establishing that the title deed/ownership certificate matches
with the customer’s details. Lawyers usually do this work of vetting along
with the registrar/sub-registrar office and check the originality of the
documents. It’s a little strange but in North India, it’s not uncommon to
discover fraud at this level of assessment – companies have found 3-4
titles deeds against the same property, so this check becomes
extra-important.
3. Credit: Credit underwriting is the 3rd and final step of LAP processing,
which is done in-house. This is also a subjective assessment that looks at
location, quality, the pluses, and the minuses of the property against
which a loan needs to be given. Here, there is the concept of
enforceability which plays a major role.
When I look at these 3 components, ultimately the call for granting LAP
lies with the credit officer, the legal, and technical teams.

12. Question #5
Rajeshwari: Can you talk a bit more about enforceability in LAP?
Diwakar: The enforceability tends to change from city to city due to the
complex legal structure in India. Following a uniform Digital Lending
Model in India with proper enforceability is a huge challenge for Fintech
companies. Thus enforceability is strictly applied concerning local laws to
prevent frauds, commercial scams and mitigate LAP risks.
If a property is built near a slaughterhouse or a graveyard (whether these
places came up before or after the construction of the property in
question), it makes a big difference in the valuation of the property and
therefore the loan – meaning the probability of a good sale in case of
enforcement goes down drastically.
The laws are established to protect the rights of all the parties involved in
the LAP circle. These are enforced to ensure that there are no
discrepancies or disagreements involved while availing LAP in the
market.

13. Question #6
Mani: How long is the process of underwriting in LAP?
Diwakar: Underwriting is a critical component in the LAP process,
whether residential or commercial property. During Underwriting, the
buyer’s creditworthiness is measured to assess his loan criteria. In India,
Underwriting may take a few hours or a few weeks depending on the
person’s creditworthiness availing of LAP.
Credit score, income, current debt and liabilities, the value of the
collateral, etc., and several other factors are assessed before the loan is
disbursed to the customer. Underwriting ensures the protection of the
parties’ interests in the LAP process.
Thus, there is no specific timeframe that defines the process of
undertaking. The underwriter conducts a thorough assessment and
verification of the customer before approving his creditworthiness to the
Banks and NBFCs. But if I had to pinpoint a number: technical report – 2
days, legal report – 2 days, LAP assessment in 7-8 days. But the main
challenge here is to obtain all the documents which take a lot of time. A

14. best-case scenario is to complete the process in 5-6 days, but it can
certainly take a lot longer if the complexities discussed before arise.
Upon completing all these steps, the underwriter will flag green for your
loan approval, and subsequently, the money gets disbursed to you.
Question #7
Mani: Let’s assume a guy owns a very good apartment and bought it from
a reputed builder, but using a home loan (for which he is still making
repayments). Can he still avail of a LAP against this property?
Diwakar: Absolutely not. You have to deposit the original title deeds in
order to avail of a LAP and the property has to be free of any
encumbrances/mortgages.
Question #8

15. Alex: How much information for issuing LAPs is available online?
Diwakar: It all depends on the state. For example, in Haryana, there is a
document called Jamabandi which is prepared as part of the
record-of-right in every revenue estate. It contains entries about
ownership, rights, and up-to-date information of land/property. This record
is also revised every 5 years. Having said this, the title deed still needs to
be produced while applying for a LAP.
Collateral Underwriting from LOS Perspective
Diwakar: From a Loan Origination System (LOS) perspective, you can
have a workflow-based integration with technical or legal teams.
● The reports from these teams can be uploaded into LOS and useful
data can be derived from them.
● Documents like MOF details, geolocation, unit values, credit visit
reports, etc. can be provided as data fields for better controllership.
● Legal checklists can be created using LOS, reducing the turnaround
time for gathering important details

16. Question #9
Mani: Diwakar, let’s assume that the LOS is already built-in to the
process. If this is the case, then what is the main pain point that can be
addressed?
Diwakar: See at the moment, due to the uncertainty in various aspects of
underwriting, most of the processes are manual. But if all parties involved
– the NBFCs, technical, legal, and credit teams are all on the same LOS
system or have APIs that can talk to each other, then I have to say the
communication, exchange of documents and decision-making are all
improved greatly. Sometimes what happens is that due to lack of some
documents, the valuer might give a lower valuation to the property. At this
time, we have to go back to the customer to get those documents to
improve the valuation and get them a better value for their loan. At this
point, a LOS really helps.
Question #10
Mani: How many stakeholders are there throughout the process?

17. Diwakar: The customer, the internal stakeholders – sales officer, credit
officer, operations officer, and larger NBFCs will have their own technical
and legal teams.
Question #11
Rajeshwari: Why is re-evaluation a red flag in assessment? Also, is it
industry practice to have a single valuer or best of two, considering it’s a
subjective opinion?
Diwakar: Unless it’s for a technical reason, and the customer is trying to
influence the value of collateral, it’s considered to be a red flag. It could
also happen if the valuer has made some errors while valuing.
The number of values depends on the value of the collateral; say for
example property of Rs 10cr and above is very large collateral. You can
also build some parameters into this – for eg. in cities like Chennai,
Bangalore & Gurgaon, the rates of apartment complexes are quite
uniform – Rs. 8000/sq.ft just to throw in a number. Now, if the valuer
comes out with a number of Rs. 9500/sq.ft, then that’s a red flag. But the
valuation officer needs to have that kind of intelligence to figure this out.

18. This is where websites like 99acres and Magic Bricks come in with their
huge repository of data which is quite useful.
Question #12
Mani: What is the cost per application for LAPs, whether it’s an approval
or rejection?
Diwakar: The valuation and legal reports each cost Rs. 1500 per
property. The mortgage registration fee is about Rs. 3500, which normally
covers the cost of valuation and legal. If the loan is approved, then the
lawyer takes an additional fee of Rs 900 for ‘document vetting’.
Question #13
Alex: What is the drop percentage from the application process to the
next stage?

19. Diwakar: It’s about 50%, primarily because some of the documentation or
the other may be missing and this creates a higher drop percentage. But
this could also be because of other reasons from a legal and credit
standpoint.
Loan Disbursement Process
Diwakar: LAP disbursement is a very heavy process. The complexity
here lies in the legal stage – where lawyers insist on a 13-year chain of
documents. Lawyers also need to thoroughly vet original documents in
order to avoid fraud. Mortgages can be created in 2 ways:
● Equitable: Here you deposit the title deeds and sign a document for
proof of deposit.
● Registered: When you register your mortgage with the SRO (Sub
Registrar Office).
LAP disbursement is done Over-The-Counter (OTC) process where the
loan is booked in the system but not paid immediately in case of any
non-critical documents (eg. electricity bill, house/property tax, certified
copies of previous docs, etc.) are missing. Payment is made to the

20. borrower once the OTC docs are submitted. Finally, interest is calculated
from the date of disbursement, and sometimes from the date of loan
booking.
Post Disbursement Documents (PDD) Process
Diwakar: The loan is disbursed in the absence of certain documents
which can be submitted within a certain period of time. For instance, if the
entire property docs are with another institution, we issue a balance
transfer after taking the outstanding balance from the other institution
through an SOA. Then we issue a cheque or a DD in favor of that
institution, and the documents are released to us. Once this is done, the
loan can finally be disbursed.
Question #13
Rajeswari: What type of mortgage do you have to report to CERSAI?

21. Diwakar: In simple terms, the CERSAI is an online database for storing
all the information about loans and mortgages for properties (intangible,
immovable, and movable) that are availed from banks. The CERSAI’s
objective is to keep transparency in all information to avoid discrepancies.
Since 2016, the Central KYC Record Registry (CKYCRR) has been
established to operate and maintain CERSAI. This CERSAI search
serves the RBI, the PFRDA, SEBI, and the IRDAI.
Lately, CERSAI has expanded its objectives to include the registration of
all kinds of mortgage loans that exist in India. It also includes the
registration of any collateral for intangible assets, like accounting debts.
The government has recently issued a fresh directive for all lenders
(financial institutions, banks, etc.) to register with CERSAI mandatorily.
They must furnish all information related to the concrete guarantees
created. The CERSAI registration should be completed within 30 days of
the actualization of the security interest.
Collateral Modules in LMS

22. Diwakar: Typically 3 modules – OTC, PDD, and Custody are built-in in
the Loan Management System. Custody will have the list of documents.
The collateral modules for other types of collateral are relatively simple
and easy to harmonize. Eg. in auto loans, the registration certificate,
insurance invoice are standard collateral documents across the industry.
Question #14
Mani: What is the current market for LAP in India?
Diwakar: The LAP market is currently at the state of a record-low interest
rate regime. There is a 42% on-year rise in demand for (BT) Balance
Transfers, indicating a steep 26% surge for home loan collaterals in the
first half of 2021.
The current demand for Loan Against Property (LAP) during this 2021
period has witnessed a 20% rise. The surging demand is heavily
attributed to the RBI’s decision to keep the repo rate constant at 4%,
unchanged.

23. The soaring demand for home loans is at par with the rising demand for
residential and commercial properties across key real estate markets of
India. The government’s several initiatives, such as reducing stamp duty
rates and keeping the repo rate constant, are steps in the right direction.
These progressive measures have been highly instrumental in thriving the
overall consumer sentiment, encouraging almost 50% of the borrowers to
opt for tenors less than 15 years. The LAP is tracked on a daily basis to
avoid delinquencies. It operates on a range of 25% to 50% of the
portfolio. 2 years from now, the unsecured loan market will increase.
Some Concluding Remarks
Loan Against Property gives superior liquidity compared to the other
products. Mr. Diwakar Pundir says that in the last ten years, LAP has
been the only product that offers tangible collateral to the borrower that
he can leverage. Default rates are much lower compared to others.
Fintechs in the current market will continue to operate in the Unsecured
arena. It will witness the scaling of P2P lending in the future as India’s
most prevalent form of borrowing. There are very few NBFC lenders in

24. the Auto and cars segment. For example, Sundaram, Chola, etc., in
Chennai.
More than 10% of repeat customers are expected in this market. Large,
mid, and small-scale businesses are the primary customers in the market.
The industry is witnessing steady growth despite the pandemic affecting
economies across the country.
It is a fluid situation, and the market is evolving rapidly. There is a vast
scope for LAP in the market. It is a very lucrative business opportunity in
the market. Partnering with banks and NBFCs will add more originality
and increase profitability for the Fintech firms. All these points help the
Fintech firms to build a better application to address the customer’s
needs.
2020 pandemic made us feel like the entire world had stopped. Still,
students worldwide need to pay off their student loans, patients have to
clear the medical debt, and businesses will be requiring money to
manage their finances efficiently to stay afloat.

25. All this helps to make fintech apps a popular and functional financial
instrument. Many entrepreneurs and startups are looking for P2P lending
app development.
Whether you want to expand your business quickly or require full-cycle
P2P money lending, Habile Technologies can help you do that. Get in
touch with us today, and our experts will be in touch with you in no time!