John

The Reserve Bank of India is in the process of reworking the definition of commercial real estate. The revision is aimed at taking hospitals and educational institutions out of the ambit of commercial real estate. It has been observed that clubbing the loans to hotels and hospitals under commercial real estate has swelled the banks exposure to sensitive sectors, giving the impression that they were still indulging in risky business despite the Reserve Bank of India’s warnings on checking the asset bubble. Bankers, on the other hand, explained that the business dynamics and risk profiles of hospitals, hotels and educational institutions are different from the real estate sector.

But they have been clubbed together under commercial real estate, a sector for which the RBI has put stiff risk weights to slow down bank funding. The central bank raised risk weightage from 100 per cent to 150 per cent in a span of less than 21 months. This had direct implications for pricing loans to hotels and hospitals. While giving loans for hotels and hospitals, banks have to factor in the cost of risk weight, leading to higher lending rates.
Educational institutions and hospitals are part of the social infrastructure, so they should be viewed differently while prescribing risk weights. While the RBI had raised risk weight for commercial real estate, in the recent policy it brought down the risk weight for home loans below Rs 20 lakh, so as to provide an incentive for banks to bring down rates on retail housing loans.