Commercial real estate loans may cost more

Commercial real estate loans may cost more
The Hindu Business Line, October 29, 2009, Page 7

Provisioning norms for advances raised to prevent NPAs.

Our Bureau, Mumbai

Interest rates on loans to commercial real estate sector may move up with the Reserve Bank of India increasing the provisioning requirement for advances to this sector from the present level of 0.4 per cent to 1 per cent.

The RBI has expressed concern that loans to commercial real estate sector have the potential to become NPAs as this sector has witnessed large-scale restructuring of advances.

In its Second Quarter Review of Monetary Policy 2009-10, the central bank said, “In view of the large increase in credit to the commercial real estate sector over the last one year and the extent of restructured advances in this sector, it would be prudent to build cushion against likely non-performing assets (NPAs).”

In his address, the RBI Governor, Dr D. Subbarao, said while at an aggregate level, the amount of non-food bank credit going to the commercial real estate is small, at about 3.7 per cent, the rate of credit growth has been accelerating.

Second, the restructuring proportion of bank loans to this sector is 14 per cent, against 4 per cent at an aggregate level. These were the reasons that prompted the RBI to increase the provisioning requirement.

Asked about the impact of this move on lending by banks to this sector, Dr Subbarao said: “I am sure that banks are going to make judgements in their best interests. This (increasing the provisioning) will certainly make banks to look at or revisit their lending to the real estate sector. It will also drive the necessary correction in prices.” When asked if banks will pass on the increase in provisioning to their customers, the Chairman and Managing Director, Canara Bank, Mr A .C. Mahajan, said that when pricing products, banks do not pass all the expenditure incurred. The loan is related to the benchmark prime lending rate and the move will not have much impact.

The State Bank of India Chairman, Mr O. P. Bhatt, said that the move could push up the rates on loans to the commercial real estate sector by 2-3 basis points.

However, according to the Bank of Baroda Chairman and Managing Director, Mr M. D. Mallya, the 0.6 per cent increase in standard provisioning does not amount to much and is unlikely to have an impact on interest rates. In the case of Bank of Baroda, the total exposure to commercial real estate is around Rs 4,000 crore, he added.

By restoring the provisioning for commercial real estate to old levels, the RBI is indicating that it is happy with the recovery. But the step will make banks more cautious while lending to realty sector, said the UCO Bank Chairman and Managing Director, Mr S. K. Goel,

No asset bubble issue

The ICICI Bank Managing Director and CEO, Ms Chanda Kochhar, said it is not an issue of asset bubble.

“In between, there was not much credit flow to the commercial real estate sector. So the relaxation in the provisioning norms was to increase the flow of credit to the sector. Now that there is sufficient credit flow to the sector and activity has picked up , the standard asset provisioning has been restored,” she said.