Banks to hike lending rates on commercial realty loans

The Reserve Bank of India's (RBI) decision to up commercial real estate property loan provision of banks may force the lenders to hike lending rates to the sector in the near term, said bankers.

Banks are contemplating rate hike of anywhere between 0.5 per cent and 1 per cent in commercial real estate loans in the near future to pass on the burden of high provision to customers, a senior official of Union Bank told PTI here.

"This (high provisioning) will impact the credit flow to the real estate sector and will leave no option to banks but to increase their lending rates on commercial real estate loans by 0.5-1 per cent," the official said on conditions of anonymity.

Reserve Bank Governor D Subbarao, while announcing the quarterly monetary policy review on October 27, asked banks to provide 1 per cent of the loan given to commercial real estates as provision, up from 0.4 per cent now.

These loans comprise those given to builders for construction of commercial properties like offices, malls, hotels etc.

Though the RBI move is being viewed as a prudent measure to avoid asset bubbles in the system in the long term, bankers said this "extra cautiousness" may hamper the business.

A top IDBI Bank official said besides an imminent hike in interest rates, banks may also turn extra cautious to lend to commercial realtors, given the indication from the RBI on asset quality to this segment.

A Dena Bank senior official said the loan demand from commercial realty sector may largely get impacted with the RBI move.

"Even now, there is no demand from manufacturing sector and enquiries coming mainly from the commercial realtors. This development (from RBI) may further hit the credit flow," the official said.

The apex bank also asked banks to hike their loan loss coverage ratio to 70 per cent by September 2010.

As of now, banks are offering loans to commercial real estate companies at a little over to the bank prime lending rate.