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Published Aug 31, 2020

How secured are banks on property led loans? What works in an NPA – Cover or Quality?

To start with, look at the below two different data sets – Registered Mortgages with sub-registrar in Mumbai and Delhi and the NPA Ratio of all Scheduled Commercial Banks in India. The attempt is to identify if fair mortgage reporting practices are related with growing NPAs in India.

Issue 1: The sub registrar records don’t give the right picture of loans disbursed on properties. The biggest beneficiaries in Real Estate -“Banks” practice “equitable mortgage” which means they keep the original documents in safe-keeping and mostly not do registrations with the sub – registrars. Unlike every sale and lease which is recorded at sub-registrar level, all property led loans are not captured, therefore, title risks associated to buy and enforce these properties (primary and secondary market) is very high. While the banks predominantly rely on CERSAI (Central Registry of Securitisation Asset) since last 3-4 years, the risk persists due to a very small cost and procedure not under taken. Even in CERSAI, many times one can only come to know the loan amount and not the proper project name and unit number. It’s surprising to note that any property loan today has a compulsory insurance to be taken by the borrower, but how can there be no standard process of bringing property loans into public domain for title accuracy and fraud prevention. What is the solution? By paying the “English Mortgage” (it is a registered mortgage done with the sub -registrar of assurances so that the mortgage is fully secured and is in public record) and paying just 0.2% of the loan value with sub registrars, one can solve this issue to a fair extent.

Issue 2: According to RBI Report (Progress of Banking in India 2018-19), one can establish that the total outstanding loans with Banks stand at INR 97.09 trillion. Of these housing loans stand at INR 12.04 trillion and Commercial Real Estate loans stand at INR 2.43 trillion. Both loans when totalled come to INR 14.47 trillion though direct and indirect lending to Real Estate stands at INR 21.45 trillion as on March 2019. The NPA Ratio in India is at 9.07% of total loans (highest in emerging economies and 2nd highest in the world after Greece). The gross NPA is at INR 9.36 trillion and Net NPA is INR 3.55 trillion meaning around 61% of NPAs value is being written off or devalued. What is quite evident from the fact that of the cases which were taken to the courts (SARFAESI/DRT), only 15% recovery was possible of the loan outstanding with borrowers. Interestingly, INR 73.81 trillion of the total outstanding loan (INR 97.09 trillion) is given under ‘Secured Tangibles’ which could be gold, property, plant & machinery, etc which is 76% of the total outstanding loans. Above facts suggests the highest risk is not NPAs but the valuation and quality of the tangibles secured by banks.

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