Interest rates on loans to Commercial real estate sector may
move up with the
of 0.4 per cent to I 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. It was felt that 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).
The Reserve Bank of India's move to increase provisioning
norms for advances to the commercial real estate sector can be viewed either as
part of a prelude to a tighter money policy or as a mere cautionary measure.
The RBI offers explanations for both even while it places its monetary stance
against a need for tightening.
As a specific regulatory measure the restoration of the standard asset provisioning of one per cent for commercial real estate loans is
a safety norm since the value of loans restructured in the recent period in the
sector has risen far above the average level. The aim therefore is both to
protect banks against spurts in their non- performing assets by tempering
robust lending to this sector and to prevent asset prices over- heating.
The degree to which commercial real estate activity gathers
speed depends to a large extent on the robustness in economic activity. So far,
fresh capacity expansion in the real economy has yet to pick up. But, when it
does, the demand for fresh commercial real estate stock will generate demand
for bank credit. The higher provisioning norm, even if it is merely a return to
the standard, wills doubtless lead banks to raise interest rates. As the RBI's
own experts have pointed out, banks are quicker to respond to signals for
upward revisions in interest rates than they are to signals for a downward
movement.
Coupled with the fact that most banks adopt variable interest rates
around their Benchmark Prime Lending Rates, lending to this sector may not
necessarily damp on account of higher provisioning. Assuming the average
interest rate for the sector does move up most borrowers will want to factor
the higher cost of funds into their asset prices. Given the existing capacity
in their formation, the end result may be quite the opposite of the RBI's
stated objective of correcting that is lowering asset prices. Self- restraint
in lending to this sector may help banks guard against default risks.
Alternatively, the RBI could raise key rates in which case more than the
commercial real estate sector will feel the pinch.
The UCA Bank Chairman and Managing Director has opined that
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.
The Bank of Baroda Chairman and Managing Director is of the
view that 0.6 per cent increase in standard provisioning does not amount to
much and is unlikely to have an impact on interest rates while the State Bank
of India Chairman is of the view that the move could push up the rates on loans
to the commercial real estate sector by 2-3 basis points.
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 and activity has picked up, the standard asset
provisioning has been restored ICICI Bank Managing Director and CEO opined.
Banks will now be a little more cautious while lending to
real estate players however, interest rates are at their lowest in recent
times, and even a marginal hike due to this tightening in provisioning will not
affect the overall sector seriously. Rather, it might help, as the Central Bank
is trying to control the asset prices for end users. If well-implemented, this
policy will benefit property buyers in the long run. The projected increase in
inflation is in line with India's long- term inflation history, and is automatically factored into the markets and overall market sentiments. Therefore, this
would not hamper the green shoots of recovery which are currently being
witnessed after a protracted slowdown period over the previous year.
As far as real estate asset prices are concerned, tinkering
with the volume of funds will not work in the absence of measures to make the
market more transparent. The housing price index is a step in the right
direction as is the draft model legislation for the regulation of the real
estate sector.
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