Better norms for lending

MONETARY POLICY MID-TERM REVIEW 2007-08/ SUPERVISION AND REGULATION

RBI has advised 10 banks to improve their risk management processes at operating levels and asked them to spell out the required norms for lending to the real estate and capital markets.

The banks will now have to be more cautious about their risk management practices with regards to the real estate lending.

The Reserve Bank of India (RBI), in its annual policy statement today, informed that in a supervisory review process (SRP) conducted during January to March 2007, there were 10 banks with certain irregularities with regard to the implementation of these banks' own approved policies, especially in the case of exposures to real estate.

These 10 banks were found to have a real estate and capital market exposure in the excess of 200 per cent and 25 per cent respectively of their net worth.

The SRP conducted by RBI was split into two phases. Under phase one, detailed information of exposure to sensitive sectors, including real estate sector was sourced from these banks.

Then, the RBI officials conducted onsite scrutiny focused on lending towards real estate and other sensitive sectors, companies involved, branch-wise large individual exposures and other related matters.

The apex bank's initial review revealed that real estate exposure had increased across all banks, mainly on the account of individual housing loans.

Also, commercial real estate exposure had risen in varying degrees. Exposure to the capital market lending was on the rise as well. However, none of the banks had breached the regulatory limits.

Following this review, the banking regulator had advised these banks to improve their risk management processes at operating levels.

Additionally, they were given an indicative list of deficiencies and irregularities and advised them to explicitly spell out the required norms for lending to the real estate sector in their policies.

According to RBI data, banks lending to the real estate sector on a year-on-year basis as on August 17, 2007 increased by 52.9 per cent to Rs 16,145 crore. While the housing loan portfolio of banks on a year-on-year basis as on August 17, 2007 grew by 16.6 per cent to Rs 33,489 crore.