Banks do not share RBI's concerns over realty
The central bank last week raised fears of equity and real estate bubbles bursting and leading to financial instability as increased bank finance gets channelised into the sectors
Oct 07, 2014
Source : dnaindia.com
RBI

 

Sharp rise in equity, real estate prices raises risk of financial instability in the event of an unanticipated bursting of building equity, real estate bubbles, says RBI.

Lenders, which are still going slow and cautious on investing in real estate, have dismissed fears raised by the Reserve Bank of India (RBI) over a bubble being built in the sector.

The central bank last week raised fears of equity and real estate bubbles bursting and leading to financial instability as increased bank finance gets channelised into the sectors. It expects more bank finances to be directed to construction activity as economic activity picks up.

Banks have been funding special purpose vehicles (SPVs) of builders mostly in residential projects. Loans to real estate companies rose 17.6% (year on year) in August to Rs 1.6 lakh crore when the overall loan growth was 10%, according to the latest RBI data. Loan to the construction sector grew 31% to Rs 70,600 crore.

Parthasarathy Mukherjee, president, large corporates and international business, Axis Bank, said banks are more confident of handling real estate credit as there are few incidences of bad debt from the sector. "Banks also lend to sectors from where there is demand. Now there is a lot of demand from the sector as compared to others," said Mukherjee.

However, big banks such as State Bank of India (SBI) continue to be cautious. Praveen Kumar Gupta, deputy managing director and chief financial officer, said, "Our exposure to real estate is negligible and we have not expanded credit to the sector."

Aniket Bagve, an expert with a leading non-banking finance company in real estate financing, however, believes that there is no danger in lending to the real estate sector as these are all asset-backed securities. "Also, the receivables and the land are escrowed to the banks. Unlike the manufacturing sector where financing is done based on projections, in the real estate projections are realistic and easier to realise."

The largest chunk of bank credit has been allocated to real estate at the end of the first quarter ended June 30. Real estate insurance and business services got 10.4% the bank credit, while manufacturing got just 3.5%, trade, transportation and communication, 2.8%. The only other sector which got as more loans than the real estate sector is electricity, water and gas supply. Public sector banks typically lend at 14% to 15 % while the private banks lend at 15% to 16% while NBFCs lend at 15 to 22%."

"The sharp rise in equity and real estate prices have raised the risk of financial instability in the event of an unanticipated bursting of building equity and real estate bubbles," RBI said in its half-yearly monetary policy document released along with the fourth bi-monthly credit policy document. Construction activity should benefit from policy initiatives to boost affordable housing, investment in real estate, and refinancing of infrastructure projects coming back on-stream. Ahead of this recovery, bank credit to construction has been accelerating and should gain further momentum as efforts to improve credit disbursement support the revival of demand, the report had said.

However, Raghuram Rajan, governor, RBI, said in a press conference after announcing the policy last week that he is not worried yet. "The loan has to be for most houses at most 80% of value plus, there is often a cash component in these purchases that is pure equity that the buyer has in the house. So to that extent, there is a fair amount of cushion below the bank's loan.

"And so even though loan growth to real estate sector has been quite strong -- first, it is still a relatively small portion of bank balance sheets and second, there is a sufficient equity cushion as of now. Going forward, we will have to see how the real estate prices evolve and at what point we start getting more concerned. As of now, I am not overtly concerned, barring a few locations where it seems frothing," he said, without revealing further.

 
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