Developers React on RBI’s Move to Tighten Banks Provisioning For Real Estate Loans

October 28, 2009	(Be the first to rate this story!)  Loading ...
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There were mixed reactions to the likely fallout of the RBI’s move to tighten banks’ provisioning for real estate loans. As a result, for every Rs 100 crore advances made, banks need to provision Rs 1 crore. The central bank said in view of the large increase in credit to the commercial real estate sector over the last year and the extent of restructured advances in this sector, it was prudent to build a cushion against likely non-performing assets. A senior banker said it was also applicable to loans given to individuals who purchased more than one apartment.

Mr Kumar Gera, Chairman, Confederation of Real Estate Developers’ Association of India, said it was a detrimental step and would tell upon the cost of funds being made available to builders. While it was difficult to gauge the impact immediately, it was obvious that any cost increase, part of whole, in all likelihood would be passed on to the end-user.

Mr Priyankar Bhikshu, Head of Consulting and Research (India), DTZ International Property Advisers, said that as a precursor to the tightening of the easy money policy, the central bank has turned its attention on asset prices again. As a result, developers would find the cost of loans go up, which could adversely impact their liquidity position and might force them to pass on the prices to the end-users. This, combined with the sluggish sales of last few months, indicated that the sector’s recovery path could see some hurdles in the near future.

“On the retail (home) loan front, the distinct hawkishness in RBI’s policy points to a reversal in the benign interest rate regime. It is expected that by the end of this financial year, the mortgage rates would inch upwards and would thereby result in higher cost of home ownership. This could negate the impact of reduced home prices, which anyway has started exhibiting positive bias in last quarter,” he said.

Mr Kapil Wadhawan, Chairman and Managing Director, Dewan Housing Finance Corporation, felt it had come in too early as the commercial segment was yet to pick up. The General Secretary of the Builders Association of India, Mr Anand J. Gupta, said the move was negative to both developers and home-buyers as the industry was just about hitting the recovery path. It would neither help the economy nor the realty segment, which as such was bogged down for want of funds. Mr Kamal Khetan, Managing Director of Sunteck Realty, said, “We think that the effect on borrowing cost would not be much. Firstly the 60 bps increase in provisioning requirement, even if passed fully to borrowers, is only that much increase in borrowing cost.”

Secondly, on account of higher liquidity in the system, banks might not fully pass it on. Also, banks vary their rates for commercial real estate lending based on borrower profile and hence the impact would differ from borrower to borrower. Borrowers with better credit profile will see least impact, he said. The impact would not be significant, said Mr Shobhit Agarwal, Joint Managing Director (Capital Markets), Jones Lang LaSalle Meghraj. On the contrary, banks would now be a little more cautious while lending to real estate players. Interest rates are at their lowest in recent times, and even a marginal hike due to this tightening in provisioning would not affect the overall sector seriously. It might help, as the central bank is trying to curb the formation of an asset bubble.

News Published Under:   Real Estate Developers |

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