A loan against property (LAP) is a loan in which the borrower pledges a building or land that they own, such as a shop, a house or a factory, as security. If the borrower does not repay, the lender can sell the property to recover the money. Small business owners in India use LAP to borrow larger amounts, for longer, and at lower interest than an unsecured MSME loan.
The lender has to answer two questions before it lends. First, does the borrower really own the property, and is it free of other loans? Second, what is the property worth?
The first question used to take weeks. A lawyer visited the land records office and read the paper records. Now many states have put their land records online, as part of India's digital public infrastructure. The lender's software reads the digital record and checks the owner's name and the history of the property. It also checks whether another loan is already registered against it.
For the second question, an automated valuation model (AVM) estimates the price. It compares the property with recent sales nearby and uses data about its size, location and photographs. In India, the lender usually also sends an approved valuer to inspect the property and confirm the price.
Say a shop owner in Nagpur owns a shop worth about ₹50 lakh. The lender does not lend the full value. It lends only a part of it, so that it can still recover its money if prices fall. The part it lends is called the loan-to-value ratio. The loan agreement must carry stamp duty, a state tax on legal documents, which is now often paid online through e-stamping. The loan is repaid in monthly EMIs, often over ten years or more.