Lenders face stress in micro loans against property as delinquencies rise

Earnings commentary from non-banking financial companies (NBFCs) and some housing financiers for the September quarter showed that delinquencies in small-ticket loans against property (LAP) were rising. This is a sign that pressure is now spreading beyond unsecured microfinance into what was once considered a relatively stable asset class, analysts said.

LAP is a secured loan in which borrowers pledge residential or commercial property as collateral. Such loans typically cater to self-employed individuals and small businesses, with average ticket sizes ranging from ₹10-75 lakh, depending on the lender and market segment.

Micro-LAP is a small-ticket version of LAP, targeted at micro-entrepreneurs, shop owners and informal-sector businesses seeking secured funding. These loans generally range from ₹2-10 lakh, with some lenders offering average ticket sizes of ₹3-5 lakh.

For NBFCs, growth in the LAP segment was about 32% on year in FY25 and is expected to slow down to 27-29% on year in the current and next financial year, according to Crisil Ratings. NBFCs’ unsecured microfinance loan growth declined by 12% in FY25 after growth of 29% in FY24, ICRA said. It has projected this loan book will grow 10-15% in FY26. Similar data for the micro-LAP segment is not readily available.

Analysts join the dots

While most lenders believe the deterioration in asset quality is still manageable, some have pointed out that the segment is seeing demand soften after two years of stability. This suggests the strain on low-income borrowers is widening across both unsecured and secured loan portfolios.

Although lenders have not highlighted a direct correlation between the two sets of loans, sector analysts are joining the dots. “The stress that first surfaced in the microfinance segment has increasingly spilled over into the micro-LAP portfolio, largely because the underlying borrower base overlaps,” said Anil Gupta, senior vice president and co-group head, financial sector ratings, ICRA.

Many customers who have struggled to service their microfinance loans have also seen their repayment capacity weaken on the secured side. While micro-LAP loans involve collateral and therefore have lower delinquency levels, the transmission of stress from unsecured to secured products is evident, Gupta said.

Piramal Finance, where mortgages account for 56% of the total assets under management (AUM), has seen delinquencies inch up in the LAP segment. While the company insists the rise represents a reversion to historical averages rather than a structural shift, they do expect LAP delinquency to be higher than home-loan delinquency.

Loans for which repayments were delayed by more than 90 days for Piramal Finance’s LAP borrowers rose to 0.6% at the end of September, compared to 0.5% a quarter ago and 0.3% in the same period last year. LAP contributes nearly 29% of the non-bank lender’s total AUM of ₹91,447 crore.

Managing director and chief executive Jairam Sridharan told analysts in a post-Q2 earnings call on 17 October, “Whether it is indicative of something underlying and whether there is a risk issue, it is too early to tell. But we are certainly seeing a reversion to a more average risk performance in the LAP business compared to the abnormally good environment that we have had for the last two-and-a-half years.”

Sridharan said the micro-LAP segment remained under visible stress. The business was still small, at a few hundred crores, but Sridharan warned that “micro-LAP will get worse before it gets better” and is yet to hit peak stress, unlike mainstream microfinance, where conditions have largely stabilised. He expects the micro-LAP business to remain under some stress for a couple quarters at least.

Five Star Business Finance, one of the largest pure-play secured lenders to small businesses, also saw its asset quality worsen in the September quarter. The company’s gross stage 3 assets – equivalent to gross non-performing assets (NPAs) for banks – rose to 2.64% as of September 30 from 2.46% a quarter ago and 1.47% in the year-ago period.

The company’s joint managing director and chief financial officer Srikanth Gopalakrishnan told analysts in a post-earnings call on 29 October, “The concern again is on the ticket size. So, if you look across our portfolio, where we see higher delinquencies or higher NPAs is still in the sub ₹3 lakh ticket size.”

Gopalkrishnan believes this lower-ticket-size segment is where borrower behaviour has temporarily worsened after witnessing write-offs in the microfinance sector.

Firms hesitant to liquidate collateral

Jinay Gala, director at India Ratings and Research, said, “Micro-LAP definitely has an overlap with MFI (microfinance institution) customers, and the challenge, especially in the South, is that the collateral is largely in tier-3 to tier-5 towns.” He added, “These collaterals are very difficult to enforce, and if you go and enforce them for sale, you typically face a loss of around 30-50%.”

According to Gala, the problem is that many borrowers understand that lenders are unlikely to liquidate the collateral because distressed sales lead to lower valuations. So, they tend to negotiate. “Many of them are using this as a tool to delay payments because they are facing cash-flow challenges,” he said

Similar caution is emerging across new entrants to the segment. IndoStar Capital Finance, which is scaling its micro-LAP franchise, is “taking a calibrated approach by rolling out micro-LAP across branches slowly”, and emphasising “portfolio quality, risk-reward, and investment discipline,” its managing director Randhir Singh told analysts on 31 October. The lender aims to grow LAP to 20-30% of its total AUM but will moderate expansion in the near term to maintain asset quality.

NBFCs remain key players in the micro-LAP segment, which has emerged as a high-growth area. According to CARE Edge Rating, the total micro-LAP loan book is expected to grow more than 25% in FY26, driven by self-employed borrowers and small businesses seeking secured, affordable funding.

Meanwhile, Aavas Financiers, a major NBFC offering affordable mortgages, pointed to localised stress in certain pockets, particularly in Karnataka, eastern Madhya Pradesh, and tariff-hit clusters in Gujarat. The company responded early by “tightening credit filters, slowing down disbursement in affected micro-markets, and strengthening field verification,” managing director Sachinder Bhinder said on 11 November.

While the situation is stabilising, the company continues to operate with caution by sharpening credit and income-assessment standards.