Banks’ credit to realty sector expands in 2008-09

Banks’ credit to realty sector expands in 2008-09
The Hindu Business Line, June 22, 2009, Page 1

Lowering of risk weights may have resulted in higher exposure.

M.V.S. Santosh Kumar

BL Research Bureau Real estate developers may have just got out of a severe liquidity crunch; but data from the Reserve Bank of India suggest that bank credit to the realty sector has actually expanded.

Scheduled commercial banks’ outstanding credit to real estate grew from 1.8 per cent of non-food credit at the end of March 2006 to 3.2 per cent by February 2009. Recently released annual reports of banks also suggest that loans outstanding to commercial real estate have seen strong growth.

PSU banks’ exposure up

Fourteen banks, which have released their 2008-09 annual reports, disclosed that their commercial real estate exposure grew by an average 29.1 per cent, even as total credit grew 25 per cent.

This growth was more significant for public sector banks; their real estate exposure grew 43 per cent over the year against their credit growth of 29 per cent.

Private banks such as ICICI Bank and Axis Bank, on the other hand, posted marginal growth in their real estate credit portfolio. IndusInd Bank, Oriental Bank of Commerce and Indian Bank hold higher exposure to real estate, with the sector accounting for over 8 per cent each of their total credit.

The rapid growth in real estate sector until last year could be explained by the IT boom and increased requirement for quality office space and residential space.

According to CARE’s report on Indian banking, credit to sensitive sectors (real estate accounts for 87.4 per cent of sensitive sector lending) has grown 46.1 per cent compounded annually during 2004-08, while total advances grew 29 per cent in the same period.

However, following the global meltdown, slower demand for property and steep fall in their market prices led to risks of higher slippages in banks’ real estate portfolio. Banks in turn had to tighten credit risk standards and reduce lending to this sector.

Restructuring effect

In its efforts to stimulate the economy, the RBI came up with measures such as revision of risk weights from 150 per cent to 100 per cent on realty exposures of banks and allowed restructuring of credit (until then commercial realty credit was not allowed to be restructured) up to June 30, 2009.

Reduced risk weights meant that banks did not have to set aside more capital towards their real estate loans. This, combined with high commercial real estate yields, may have prompted some banks to step up credit to this sector.

The credit growth in bank books may, however, not be entirely on account of new real estate loans.

Restructuring, which increases the tenure of the existing loans, may have expanded the loans outstanding, even without fresh disbursements.

For instance, if a real estate company has a one-year loan falling due, and got it restructured into a two-year loan, the same may continue to remain as outstanding in the bank’s books.