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Rediff.com  » Business » Banks may not ease lending to real estate developers

Banks may not ease lending to real estate developers

November 18, 2008 11:35 IST
Even though the Reserve Bank of India (RBI) has reduced the risk weightage on loans to commercial developers and cut general provisioning for commercial real estate, commercial banks may not start lending to the sector immediately.

RBI had reduced the risk weightage on loans for the commercial real estate industry to 100 per cent from 150 per cent last Saturday and similarly, standard asset provisioning requirements too were reduced to 0.40 per cent.

Lower risk weight implies that banks would now have larger capital at their disposal for advances. However, bankers still see real estate as a high risk sector and analysts say banks will only ease lending to developers after tackling the previous advances. Bank funding to realtors is expected to happen gradually over the next few months, they added.

"The sector is passing through stress, the risk has increased. We would like to wait and watch before taking a call, but as of now there is no question of passing on the benefits," an executive of a public-sector bank said.

The RBI's move closely follows industry captains including realtors meeting the Finance Minister earlier to express liquidity concerns. In the past one year, commercial banks have increased the lending rates by 150 basis points and risk weightage on loans to commercial developers in a bid to stem excessive inflows to the realty sector.

"RBI's move is a positive step but it may not help much as banks are still struggling with loans given to developers. Nonetheless, faith and trust will return to the industry,'' said Ramesh Jogani, managing director of Indiareit Fund Advisors, a real estate fund manager of Ajay Piramal group.

Akshaya Kumar of Park Lane Property Advisors adds: "Some amount of liquidity will come to the industry in the next couple of months but mostly to big players. I do not think interest rates of commercial developers will ease now," Kumar said.

Apart from bank funds, almost all sources of funds such as external commercial borrowings (ECBs), capital markets and most importantly, property market have dried up in the last year. Due to high interest rates and monthly loan pay-outs, property transactions have halved from the beginning of this year, limiting their cash flows of developers and their execution abilities.

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Bankers also say home rates may not dip further as lending rates are close to deposit rates. Currently, deposit rates are around 10.5 per cent.

"We have been evaluating the impact of lower provisioning norms, but there is no scope for further relaxation in the interest rates on home loans. However, it would encourage us to raise our lending activities in the sector," said a senior official at a mid-size public-sector bank.

However, property developers expect banks to ease lending and cut rates after the RBI's move. "There is liquidity in the system but it has to come out. It all depends on whether bankers are ready to lend to property companies," said Sarang Wadhawan, managing director of Mumbai based developer HDIL.

Stocks of most realty firms ended in the red on Monday as the BSE Realty Index closed 5.17 per cent down from Friday's closing. DLF, the country's largest property developer lost 4 per cent whie HDIL stock was down 4.56 per cent, Indiabulls Real Estate was down 7.54 per cent.

NON-STARTER

RBI had reduced the risk weightage on loans for the commercial real estate industry to 100 per cent from 150 per cent last Saturday.

Standard asset provisioning requirements too were reduced to 0.40 per cent.

The RBI's move follows industry captains including realtors meeting the Finance Minister earlier to express liquidity concerns.

Raghavendra Kamath & Niladri Bhattacharya
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