Methodology:

An existing property that you own is pledged and a loan is taken against it. It’s a very good option for both salaried and self-employed people alike. The salaried can borrow against property at lower rates than personal loans and similarly self-employed can borrow against property at lower rates than any of the business loans (CC Limit/Working Capital)

You can avail loan against Residential, Commercial and Industrial properties. Every bank will have their own criteria to evaluate the fundability of the properties. Ex – Some bank may fund you against B Khatha properties also and some may prefer to fund only against A Khatha

Consideration

1)           Property Valuation & 

2)           Eligibility to repay

Both the criteria are simultaneously put to use to arrive at the funding and will never depend only on one. Lower of the two is what you will get. 

Let’s look at each one of them in detail

1) Property Valuation - It’s the simple part

The banks will arrive at the market valuation of the property factoring in the following and lend a certain percentage of this valuation (50% to 70%) as loan

a) Location of your property

b) Development in and around that area.

c) Built up & plot area

Let’s say the property that you have is valued at Rs 20 crores and you expect a loan of 12 crores against that. Technically speaking it is possible but lenders will also evaluate your repayment capacity based on (all the earnings) that you have and then arrive at the loan amount

2) Eligibility to repay – It’s the trickier portion of the LAP puzzle

a) Earnings in India traditionally come in different colour especially for the business class. They come in white, black and after demonetisation in pink.

b)  Individual banks will have different criteria to evaluate the earnings and arrive at the eligibility. Some banks look at only the white colour money. Your business turnover in white, profits in white and the corresponding income tax filed, existing loans etc. But we are aware of banks in the marketplace which can evaluate the different books that you maintain to accommodate the different colours of money & then arrive at the eligibility

c) Banks can also factor in the Lease & Rent Yielding capacity of the property under consideration

Bottomline Consulting Observation: 

Early signs of difficulties are observed in generation of a particular colour of money on account of reforms like GST, E Invoicing in GST, usage of big data analytics in GST, Electronic Way Bills, penalising cash withdrawals and incentivising digital payments and the likes. 

We are not sure if these early signs or trend will sustain and become a norm (although we wish it does) but we are certain that lenders will also understand this and therefore give only a limited weightage to this particular “colour of earnings” other than white.

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