Economic times
29 Nov, 2007

For every Rs 10 lent by new private banks, Rs 3 was lent to the real estate sector. In FY07, 32% of their loans were to the ‘sensitive’ real estate market, including direct and indirect exposures. This was despite tightening of lending norms during the period.

According to figures available in the latest Reserve Bank of India’s (RBI) reports on Trends and Progress in Banking released, 32.3% of the total loans extended by new private banks were to the sensitive real estate market, up from 29.1% in the previous year.

Exposure to real estate sector is inclusive of both direct and indirect lending, it said. Lending to real estate is a part of the exposure to the sensitive sector, including lending to real estate and commodities. These sectors are considered sensitive since loans can turn bad due to external circumstances that result in a fall in asset prices.

Real estate market exposures, according bankers, include larger home loans, loans to developers and loans against property. These are direct real estate exposure. In addition, it also includes certain indirect exposures like loans to institutional lenders in housing and property as well as investments in mortgage-backed securities. The RBI report, however, does not come clearly on the definition of the real estate market. Even foreign banks had a high share of 26.3% of its total advances in the market in FY07.

In contrast, public sector and old private sector banks were more conservative in their real estate exposures with shares at 15.1% and 16.6% of their respective total loans in FY07. According to RBI, in absolute terms, the real estate exposure amounted to Rs 3,70,689 crore, up 41% over the previous year’s exposure of Rs 2,62,033 crore, way above the overall non-food credit growth of 28% during the year.

Interestingly, the real estate exposure rose sharply, despite several prudential measures initiated by the central bank during the fiscal year, requiring banks to set aside additional capital. For instance, in May 2006, the risk weight on bank exposure to commercial real estate was increased to 150% from 125%.

The general provisioning requirement for banks on standard advances in specific sectors, which also included residential housing loans beyond Rs 20 lakh and commercial real estate loans, was increased to 1% from 0.4%.

And later in January 2007, RBI increased the provisioning requirement in real estate, among others, from 1% to 2%. These measures were taken in order to contain reckless exposure by banks in the wake of unabated rise in real estate prices.

The regulator also widened the scope of real estate during the year. It has also asked banks to treat loans extended for setting up special economic zones (SEZ) as real estate loans.

Even though prudential measures have failed to curtail growth in real estate exposure, the capital requirements of commercial banks would rise if the current pace and pattern of loans continue. This could be particularly true in the case of new private banks and foreign banks which have been aggressive in areas that require setting aside higher prudential capital.
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