Avoid commercial real estate financing: RBI to coop banks

Avoid commercial real estate financing: RBI to coop banks
Business Standard, May 26, 2009, Section II, Page 2

BS Reporter / Mumbai/new Delhi

The Reserve Bank of India (RBI) on Monday instructed state and central co-operative banks to desist from financing the commercial real estate sector, as exposure in this sensitive area would not be in their interest.

The central bank reminded that the primary role of these banks is to lend for activities related to agriculture and rural development. “...State and central cooperative banks should desist from financing the commercial real estate sector,” RBI said in a notification to the banks.

The central bank said it has come to its notice that certain state and central cooperative banks have extended finance to the sector. "Further, taking exposure in sensitive areas would not be in the interest of short term cooperative credit structure,” it said.

Regarding the credit facilities already extended to the sector, the apex bank said it should be ensured that such exposures are well secured and adequate provisioning is made according to the existing prudential guidelines. “It may also be ensured that the credit facilities are not renewed,” RBI said.

The National Bank for Agriculture and Rural Development (Nabard), which regulates the rural credit institutions, said these institutions have low-deposit base and if, they divert resources to other sectors, the lending to farming and rural sector will suffer.

"We will carefully look at such exposure while inspecting the books of these cooperative bodies for FY09. We would also see if they have adequate securities\collateral for exposure to commercial real estate," official added.

According to the latest RBI data, the balance sheet of state cooperative banks (SCBs) expanded significantly in 2006-07. On the liabilities side, deposits continued to account for the largest share of the resources of SCBs, despite the modest decline in the share during the year. The high growth in borrowings, which outpaced the growth of other components during the year indicates that SCBs continued to rely heavily on outside sources for their expansion.

On the asset side, while loans and advances grew at an accelerated pace, investments declined by 12.8 per cent. During the year, the NPAs of StCBs declined in both absolute and percentage terms. The gross NPAs to total loans ratio at 14.2 per cent during 2006-07 was lower than that of 17.0 per cent in 2005-06, RBI said.

The improvement in asset quality was also discernible from the decline in "loss" assets and partly due to migration from the lower categories. Thus, there was an increase in the 'sub-standard' and 'doubtful' assets categories.