Provisioning, risk weightage raised to curb speculative interest

MONETARY POLICY 2006-07

The Reserve Bank of India's move to raise the provisioning for commercial realty loans to one per cent and increasing the risk weightage on real estate to 150 per cent will curb the speculative elements in the real estate sector, feel industry observers.

By tightening the availability of credit and putting pressure on margins, the central bank is sending out a message to the industry to slow down the current growth, they said.

Industry experts also said that the RBI move to raise provisioning for real estate loans to one per cent from the current 0.4 per cent will mean that the banks will raise interest rates which, in turn, will be passed on to the end user.

Said a senior banker, "There has been a substantial increase in demand for loans from the commercial real estate sector. Infusing a hike in both the provisioning norms and the risk weightage, is a good prudential measure enforced by the RBI. This will ensure that all banks remain attentive to the innumerable risks they could encounter through their exposures to the commercial real estate sector. The demand for loans from the real estate sector has risen by more than 80 per cent as per the latest estimates. Out of the new proposals in the pipeline, some do not necessarily exhibit high quality of credit. Hence, the move to have increased provisioning and risk weightages will come in handy for banks financing such ventures."

Said Mridul Upreti, head - capital markets at Jones Lang Lasalles, "With the RBI increasing lending requirements for real estate, the speculative element in the industry will come down. When you look at today's announcements together with the central bank's circular two weeks ago that banks can disburse loans only to projects which have got all their clearances, it would mean that a builder will no longer get money to buy land. Only after he has got all his clearances and has lined up some committed clients for his projects will the banks lend money. Speculators who were taking bank loans to build malls or commercial spaces without tying up future cash flows will find it difficult to get loans."

Upreti added that this, however, will open up avenues for mezzanine financing by real estate venture funds. "Private equity funds can now come in with debt funding which at a later date can be converted to equity. Although this will be more expensive for the developer, it will also mean that he can get more money than a bank can give him."

Said Kapil Wadhawan of Dewan Housing Finance Ltd, "RBI's move to hike risk weightage and increase the provisioning will lead to price hikes in the medium term as demand-supply will increase as funding comes down and building activity is curtailed as a result of that. There will be pressure on the developers' bottomline which he is likely to pass on to the end user."

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FACE VALUE

Provisioning for commercial realty loans raised to one per cent from the current 0.4 per cent

Risk weightage on real estate increased to 150 per cent

The move, enforced by the RBI is a good prudential measure, say bankers

Demand for loans from the real estate sector has risen by more than 80 per cent