Asset bubbles in real estate and stock markets, induced by credit, have to be carefully monitored, says the Economic Survey. It has sought sharpening of monetary policy and macro-prudential tools to deal with these, due to their implications for the economy and the strength of the financial system.
Property prices have been on the upswing, despite difficult conditions in the past four years. For instance, prices in Chennai have risen 166 per cent, 116 per cent in Faridabad, 92 per cent in Kolkata, 87 per cent in Mumbai and 54 per cent in Delhi, shows the National Housing Bank’s Residex.
Since December, Indian stock markets have run up almost 20 per cent on the back of huge inflows from foreign institutional investors, who have pumped in almost $8 billion. These inflows have been largely aided by availability of cheap liquidity from the European Central Bank.
The Survey puts the onus of something constructive on this count on the Reserve Bank of India. “There is scope for sharpening monetary policy and macro-prudential tools to deal with such asset bubbles and other risks,” it said.
Bankers, however, said they’d been following a cautious approach for some time. A senior official with the Indian Banks Association said banks have been cautious since the last financial year in granting loans to commercial real estate (CRE). RBI treats bank loans to CRE and the capital market as exposure to sensitive sectors. They carry higher risk weights, meaning banks must set aside more capital in their balance sheet for this exposure.
These sectors are always under the central bank’s radar, to detect any signs of emerging of asset price bubbles. In November 2011, it asked banks to insist on borrowers from the CRE sector to make information public about property being mortgaged to banks. This prescription was already in vogue for housing projects.
A senior finance ministry official said the reference is to be seen as advice to banks for abundant caution while lending, especially when the growth is on an upswing. The pace of lending to these sensitive sectors should never be ahead of trend growth.
With economic slowdown, the offtake of office space and dwellings has moderated from the later part of 2010-11. Avinash Narvekar, tax partner-real estate practice, Ernst & Young, said real prices had stabilised over time. In fact, in some areas, prices have come down. At present, the real estate market is not showing signs of an asset bubble.
This sector received significant amounts of money from private equity players in 2007 and 2008. This had partly reduced the dependence of real estate firms on bank funding, he added.