The RBI announcement of reduced risk weightage for sub-Rs 20 lakh loans provided a booster shot to almost all realty stocks, resulting in a sharp upswing in prices. Real estate developers such as Ansal, Mahindra Gesco, Parsvnath, Sobha and DS Kulkarni saw their stock prices move up by 4-9%. Construction companies with exposure to real estate, such as Mumbai-based Hindustan Construction, Hyderabad-based IVRCL and Nagarjuna Construction also saw stock prices move up 7-7.5% each.

The measure will benefit real estate developers as it will allow banks to increase their exposure to the sector on the same capital base. The gains will be restricted to smaller towns as most loans in the metros easily cross the limit of Rs 20 lakh. The reduced risk weightage is unlikely to lead to any significant reduction in the interest costs for the consumer though.

Indian banks have a capital adequacy ratio of 9%. Risk weightage of 75% for housing loans meant that for every Rs 100 lent to the housing industry, the bank needs a capital of 9% of Rs 75. This worked out to a capital requirement of Rs 6.75 for every Rs 100 lent to the real estate industry.

Under new norms, the capital requirement has been brought down to Rs 4.5 for the same amount of lending —for sub-Rs 20 lakh loans. The impact of the lower capital adequacy on the borrowing cost will be minimal. For instance, if a bank has a return on equity of 20% and is able to deploy this money elsewhere, it should be able to reduce the borrowing cost by 0.45% — not very significant when borrowers are paying well over 10%.

The primary impact of the measure is that it allows banks to further extend their exposure to retail loans in the housing sector without having to raise fresh capital. Therefore, real estate developers selling properties in the sub-Rs 30 lakh range are likely to be the biggest gainers from the measure.

This size rules out most of the housing development in Mumbai and Delhi, and the centrally located areas of most other cities. Most of the listed real estate companies in India, with a few exceptions, currently get the bulk of their business either from Mumbai or Delhi. Hence, the jump in stock prices could be more of a relief that RBI is not going to tighten the liquidity screws on the sector any further.

Improved market sentiment on real estate could also benefit the various realty players who have lined up public issues. However, since they are facing other issues like disclosure norms etc, a flood of real estate IPOs is unlikely in the near future.
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