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SME Lending in India

Part 03 — Products

LAP Secured

Loan against property (LAP) is the most familiar secured SME product because many Indian businesses own or control property before they have clean audited cash flows. A lender takes mortgage over residential, commercial, industrial or sometimes mixed-use property and provides a term loan or overdraft for business use. The property is the secondary exit; the primary repayment source should still be business cash flow.

Public lender pages show the economics. HDFC Bank’s July 2026 LAP schedule gives floating rack rates of policy repo rate plus 3.05%-7.50%, shown as 8.30%-12.75% when policy repo is 5.25%, processing charges up to 1% with minimum ₹7,500, and loans worth up to 65% of property market value on its product page (HDFC LAP rates, HDFC LAP product page). ICICI Bank’s mortgage-rate page for non-housing LAP/non-residential premises/lease rental discounting shows self-employed PSL customer rates from 10.60%-11.75% depending loan amount slab, valid until May 31, 2026 (ICICI Bank LAP rates).

Product Parameters

Section titled “Product Parameters”
LAP variantTypical ticketTenorLTV bandPricingBest fit
Residential LAP for business₹10 lakh-₹10 crore5-15 years50%-65%8.5%-13.5% banks; 11%-18% NBFCsProprietors/SMEs with owned home collateral
Commercial property LAP₹25 lakh-₹25 crore5-12 years45%-60%Usually higher than residentialShop, office, warehouse owners
Industrial property mortgage₹50 lakh-₹50 crore5-10 years40%-55%Risk-ratedManufacturers with factory land/shed
Dropline OD against property₹25 lakh-₹10 crore3-10 years reducing line45%-60%Similar to LAP plus OD chargesBusinesses with fluctuating utilisation
Lease rental discounting (LRD)₹50 lakh-₹50 croreUp to residual lease cash-flow tenorDSCR/LTV basedTenant and property linkedOwners of leased commercial property

LTV is rarely calculated on the borrower’s expected sale price. Lenders use lower of market value, distress-sale value, guideline/circle value adjustments and technical valuer recommendation. Many cap exposure by property type: residential self-occupied property may get 60%-65%; rented commercial may get 50%-60%; industrial shed in a narrow user market may get 40%-50%; gram panchayat, lal dora, unauthorised construction or weak-title property may be rejected regardless of value.

Section titled “Legal and Technical Due Diligence”

The legal report checks ownership, title chain, encumbrances, mutation, possession, approvals, property tax, society/no-dues, lease restrictions, succession issues, partition, power of attorney, and whether mortgage can be created. The technical report checks location, boundaries, land use, construction quality, age, approved plan, deviations, marketability, forced-sale value and insurability.

Practitioner issues are often local:

IssueWhy it matters
Agricultural land offered for business LAPMany lenders cannot take or enforce mortgage easily unless conversion and local law permit it
Property in spouse/parent nameOwner must be co-borrower or guarantor and mortgage provider; family consent may be needed
Builder floor or unregistered agreementLegal enforceability and marketability can be weak
Industrial plot from development authorityTransfer/mortgage permission and lease conditions matter
Multiple bankingPrior equitable mortgage or CERSAI charge must be checked before disbursement
Tenanted propertySARFAESI enforcement and valuation may be affected by tenancy rights

Security creation normally uses equitable mortgage by deposit of title deeds or registered mortgage depending state, lender policy and property type. Stamp duty, registration, memorandum of entry, CERSAI registration and insurance are operationally important. For companies and LLPs, charge registration with the Registrar of Companies may also apply; see Documentation & Security.

Cash-Flow Assessment

Section titled “Cash-Flow Assessment”

LAP can hide weak underwriting because the collateral looks comforting. A sound appraisal still computes debt service coverage ratio (DSCR), fixed obligation to income ratio (FOIR), business vintage, bureau, bank statement conduct and end use.

Example: a wholesale medical distributor seeks ₹1.2 crore LAP for warehouse expansion. Property market value is ₹2.1 crore, distress value ₹1.75 crore. At 60% of market value the theoretical loan is ₹1.26 crore; at 65% of distress value it is ₹1.14 crore. The lender sanctions ₹1.10 crore for 120 months at 10.75%, EMI about ₹1.49 lakh. Existing EMIs are ₹1.1 lakh. Assessed monthly surplus is ₹4.8 lakh. FOIR becomes 54%, acceptable for many secured SME policies if bureau and banking are clean.

If the same borrower had monthly surplus of only ₹2.8 lakh, the property would not fix the problem. Enforcement through SARFAESI can take time, valuation can fall, and litigation can destroy recovery economics.

RBI Conduct Nuance

Section titled “RBI Conduct Nuance”

LAP to individuals for business use may be treated differently from personal-purpose LAP. HDFC’s July 2026 schedule distinguishes prepayment and premature-closure charges by floating-rate individual business-purpose loans, non-business personal use, non-individual borrowers and MSE-certified borrowers; it also states nil prepayment/part-payment/premature closure charges on floating-rate loans to MSE-certified borrowers in the listed cases (HDFC LAP rates). This is the kind of operational rule a loan management system must parameterise by borrower type, purpose, rate type and regulatory category.

For MSE borrowers, PSL tagging depends on MSME eligibility and purpose, not merely on property security. A loan to a small enterprise against a house for working capital can be MSME PSL; a loan against the same house for personal consumption cannot be tagged as MSME PSL. The RBI PSL Directions state all bank loans to MSMEs qualify under the MSME category, but the borrower must fit the MSME definition and records must support classification (RBI PSL Directions, 2025).

Sources

Section titled “Sources”