Bank lending to real estate slows down

Banks have reduced exposure to the commercial real estate sector as it struggles with rising inventory

As the real estate sector continues to struggle with rising inventory and threats of a price crash in certain pockets, banks have also reduced lending to the commercial real estate sector.

According to Reserve Bank of India (RBI) data, between May 30, 2014, and May 29, 2015, lending to commercial real estate business grew at 7.5 per cent whereas in the corresponding period a year ago it grew at 17.8 per cent.

Bankers said the general slowdown in the economy coupled with the challenges in the real estate sector had led to slower lending. “General economic activity has been relatively low and that holds true for even commercial real estate business. Apart from this, there have also been concerns on the quality of projects which have been lower. So it is a combination of the risk appetite and also lower demand,” explained Jaideep Iyer, group president-financial management of YES Bank.

In FY15, credit to the sector grew at the slowest pace in the past 17 years, at only 9.52 per cent.

“Usually in India, lending to real estate grows much faster than overall bank credit growth… RBI data suggest the banking system seems to have turned the tap off for property developers over the past year. This has, in turn, made developers either stop construction or cut prices,” said a recent Ambit report on the real estate sector.

Commercial real estate has a higher risk weighted asset, therefore lenders are also more stringent about lending to this sector. The risk weight on the commercial real estate sector is at 100 per cent and is the higher when compared with the residential sector (under commercial) or on loans given to individuals.

Ashutosh Khajuria, executive director, Federal Bank, said considering the demand and the supply situation in the country, even banks have become cautious on lending to the real estate sector as a whole. “Before lending, banks are checking more cautiously on the real estate company, the project in the works and the viability of it. Therefore, the overall lending has come off a bit,” he added.

Experts say, considering the lending squeeze, developers have either stopped construction — which has led to an increase in unfinished product — or have cut prices.

“Data from property research houses suggest that regions like Mumbai and Delhi would take as many as 11-14 quarters to clear the existing inventory. Real estate brokers say that the time taken to clear the inventories in a healthy real estate market should be around four-six quarters,” added the Ambit report.