Risk-averse banks seek 150% collateral against loans

In spite of ample liquidity, banks are treading cautiously as far as lending to the real estate sector is concerned, and are seeking collateral as high as 150 per cent of the loan amount as security deposit from them.

This apart, banks are cushioning themselves by seeking more equity participation from the developers, ranging between 40 and 50 per cent of the project cost, and providing loan not more than 50 per cent of the cost in commercial real estate projects.

The high collateral was in the wake of a fall in property prices and subsequent revaluation of the projects, said some bankers.

"We ensure that genuine developers are not denied credit. While banks have not stopped lending to any sector, they are being selective and more cautious. As a measure against default, the security deposit is about 150 per cent of the loan amount at present. This is in accordance with the government advice," said an executive director of a public sector bank.

While banks generally seek land and the asset to be created as mortgage, which generally account for the total loan amount, they are now seeking some of the finished projects of the developers as collateral as well, to tide over the fall in property prices.

"Banks are very cautious in lending to the real estate sector, especially to commercial projects. The problem arises when the interest burden accumulates and there is no cashflow due to the inability of the developers to lease out the property. Thus, banks are seeking at least 40 per cent as promoter's own contribution and rent agreements prior to lending," said an executive of another public sector bank.

However, the rate of interest has fallen over the last three months, and banks are charging 12-15 per cent interest for lending to real estate developers, depending upon their credit rating.

Banks are cautious in lending, despite the fact that liquidity has eased over the last one month. Also, even though the interest rate on deposits coming down, banks are able to maintain growth in deposits.

For example, on a year-on-year basis, deposits have seen a growth of three per cent at United Bank of India (UBI). The bank had not seen any impact in deposit mobilisation due to falling interest rate, and the rate of growth of deposits in January was almost the same as it was during October-December, when interest rates were high at about 11 per cent, against 8-9 per cent now.

"We have to ensure commercial viability and saleability of the project. Thus, we have to see if the developer has agreement with good companies for leasing out the finished project," said T M Bhasin, executive director, UBI.

Real estate developers are also seeking restructuring of the loans, as demand has been staggering at low levels, according to bankers.

The Reserve Bank of India (RBI) recently allowed banks to restructure loans for commercial real estate projects, so that they do not turn into non-performing assets (NPAs).