PSBs trim exposure to commercial realty

PSBs trim exposure to commercial realty
The Hindu Business Line, July 3, 2009, Page 6

Rising loan defaults turn banks cautious.

Prudential step: Despite being flooded with loan requests, banks have reduced exposure to new commercial realty projects because of increasing stress on assets.

C. Shivkumar

Bangalore, July 2 Faced with mounting delinquency in the commercial real estate sector, public sector banks have pruned exposures to commercial realty to 10 per cent of capital funds.

Top PSB officials said that the measures were taken in view of the asset stress in the sector. Exposure limits till last year ranged between 15 and 20 per cent of the net-owned funds. Most accretions to the PSBs’ delinquent asset portfolios in the last financial year were from the commercial realty sector, officials said.

Although the Reserve Bank of India does not indicate sector-specific exposure ceiling on commercial real estate, the guidelines provide flexibility to individual banks to fix limits. PSBs, the officials said, have taken advantage of this guideline, as a prudential measure.

However, banks are still being flooded with loan requests for commercial realty projects. The Vijaya Bank Chairman and Managing Director, Mr Albert Tauro, said, “Yes, there are several loan applications from commercial realty projects. We are still examining them.”

Asset stress

But bank officials said that in many portfolios, asset stress was already evident, with falling loan-to-value (LTV) ratios. In many cases, the LTV ratio has dropped below the prudential level of 1.5 times. Under current guidelines, banks are expected to maintain physical asset coverage of at least 1.5 times (150 per cent) the loan value. Normally, as loans are amortised, the LTV ratio tends to rise. A falling LTV, however, implies depreciation in the value of the asset. This has begun happening, officials said.

Under international practices, banks normally tend to ask the borrowers to maintain increased margins in the event of a sharp depreciation in the value of the underlying assets. In the current situation, though the LTV ratio has dipped to about 1.1 times, there is little scope of increaseing the margins, in view of the high levels of loan delinquencies , they said. Consequently, banks were left with little alternative but to treat the assets as non-performing. A loan is treated as a substandard asset if the debt servicing is overdue for more than 90 days.

This was despite the fact that PSBs, unlike private sector banks, apply the LTV ratio on the basis of the actual project cost instead of the market value of the asset. Private banks used the latter during the heyday of aggressive asset chasing, between 2004 and 2006. But despite the tight lending practices, the officials said, in many metros, the LTV ratio was down for commercial realty projects, implying depreciation in asset values and few takers for such assets. They said that the trend was particularly pronounced in Delhi, Mumbai, Kolkata, Chennai, Hyderabad and Bangalore where the main focus was on commercial realty projects.

Debt rescheduling

Bank officials said that some project promoters had also begun approaching banks for corporate debt restructuring. The CDR mechanism allows the promoters a reprieve from being classified as non-performing assets. The terms of the loans are restructured and payments rescheduled. The mounting recourse to CDR also turned out to be a signal for PSBs to choke credit to new commercial realty projects.