Banks, Fis See Little Security In Falling Real Estate Prices

Top bankers have expressed fears that the continuing fall in real estate prices will affect the health of the financial sector as the real estate assets are the only tangible security that banks and financial institutions have for most non-performing assets.

One important reason for the financial sector collapse in the South-East Asian countries was the overexposure to real estate market.

The difference between India and the South-East Asian countries is that there banks and financial institutions had a direct exposure to the sector. In the case of India, the exposure is indirect. Banks in India have not lent to the realty sector, but advances to the corporate sector have been secured by plant and machinery, current assets and real estate.

 

Recovery through the legal process takes time due to which the plant and machinery lose their value and there is negligible cash inflow through its sale. Currency assets are rarely available to the banks after the accounts turn bad. This leaves the bank and financial institutions with the option of real estate.

Most banks were pleased at have the real estate cushion a year back. However, with the fall in real estate prices this too has proved to be of little comfort to the borrowers. To make things worse, many corporates had borrowed money when the economy was booming and real estate prices were high.

The NPAs in the banking system is of alarming proportions. At the end of the last financial year the net non-performing assets of the banking system was Rs 20,284.73 crore. As a percentage of net advances, the net non-performing assets of banking system was 9.18 per cent. The high level of non-performing assets has been a cause of concern and the committee on capital account convertibility headed by SS Tarapore had recommended that the NPA level should be brought down to 5 per cent over the next three years.

As recovery through the sale of real estate is not covering the total exposure of the financial intermediaries, only a turnaround in the economy can help. This is essentially being stunted by the high interest rates prevailing in the economy. The sale of real estate assets by the banking system will lead to further crash in the prices.

This brings to question the whether it was right for the RBI to hike interest rates to save the rupee, bankers state. It is also pointed out that the apex bank did not have any other avenue as the depreciating rupee would have created an economic crisis. Bankers feel that it is necessary to reverse the steps quickly in order to prevent high interest cost from creating further NPAs and hurting the banking system.

It is pointed out that if the rupee reflects the fundamentals in the economy and high interest cost stifle growth, the current RBI steps continued for some more time will prove to be self-defeating.