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Home > Business > Business Headline > Report

RBI tightens realty lending norm

BS Reporter in Mumbai | October 17, 2006 12:09 IST

The Reserve Bank of India's norms for lending to the real estate sector are getting stricter.

After blocking funding for purchase of land, the central bank has further tightened its measures for checking flow of funds from banks to the real estate sector. It has asked banks to ensure that credit disbursed is used only for "productive construction activity."

What RBI means is that banks should have safeguards in their board-approved policies so that funds lent are not used for any activity connected with speculation in real estate.

The RBI has been highly reactive to banks' real estate exposures for over a year now as property prices started rising sharply and have now nearly peaked.

It has bracketed home loans as well as loans to SEZs and units in SEZs with real estate exposures.

Banks have been asked to draw up extensive prudential norms for exposure to real estate sector.

The norms would encompass ceiling on the total amount of loans to real estate, single/group exposure limits for such loans, margins, security, repayment schedule and availability of supplementary finance. Such a policy is required to be approved by the boards of banks.

RBI has indirectly prevented bank funding for acquisition of land by stipulating a loan disbursement can be done only after a borrower has obtained permissions in advance from all the concerned authorities for a project.

This effectively means the prospective borrower can approach a bank after acquiring land and then getting all the permissions required.

In addition, Reserve Bank of India has raised the risk weights for capital allocation to 150 basis points on banks' exposure to commercial real estate and home loans above Rs 20 lakh (Rs 2 million).

To top these all, banks are also required to incorporate in their policy on lending to the real estate sector aspects relating to adherence to a national building code of the Bureau of Indian Standards.

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