No announcement yet.

New RBI directive on loans


New RBI directive on loans

Last updated: November 6 2006
0 | Posts
2358 | Views
  • Time
  • Show
Clear All
new posts

  • New RBI directive on loans

    There is a new RBI directive classifying construction loans to 'real estate loans'. I'd like to add the news extract here for futher discussions.

    Will this directive have any effect on the real estate sector......

    Loans for the constructions of new hospitals, hotels, cold storage warehouses and multiplexes have suddenly become hard to come by with the Reserve Bank of India (RBI) classifying such advances as loans to ‘real estate’.

    Real estate loans are actively discouraged by the regulator, which has categorised them under sensitive sector exposure. It has also asked banks to set aside higher capital for such loans.

    The reclassification comes as a big blow to the health and the hospitality sector, which till recently were identified as part of “infrastructure” where lending was encouraged. After the recent RBI directive, several banks have slowed down processing loan applications from these sectors.

    At the same time banks are understood to have made a strong pitch to the regulator for a possible removal of the real estate tag from these sectors, particularly hotels and hospitals.

    Justifying the stand, a senior banker said, “As it is, we are short of capital for meeting the Basel II accord... Besides, there is a shortage of hopitals and cold storages and treating them as real estate would be like ignoring social banking.”

    According to an healthcare study by the Confederation of Indian Industry (CII) in August, there is a big shortage of hospital beds in the country. A World Health Organisation report says that India needs to add 80,000 hospital beds each year for the next five years to meet the demands of its population.

    This, in effect, will require huge investments. However, RBI’s concerns emanate from the risks that banks are exposing themselvess as big money flows into real estate market, causing asset price bubbles.

    As on March ‘05, banks’ exposure to tourism and hotel industry stood at Rs 3,455 crore — a fraction of total bank loans. Most banks find such loans lucrative due to the high occupancy rates seen in hotels. For a bank, a real estate tag means assigning a higher risk weightage of 150%, against 100% for infrastructure sector.

    What this means is that against a capital of Rs 9 that has to be maintained for every Rs 100 loan to industry, banks have to maintain a net worth of Rs 13.5 for every Rs 100 loan to a project that is considered as real estate by the regulator.

    RBI’s fear is that lending to real estate may create an asset price bubble. Since asset price bubbles inevitably burst when speculators book profits, central bankers attempt to diffuse such asset bubbles through early rate hikes.

    Source: Financial times (Nov3 '06)
Have any questions or thoughts about this?