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Banks to be more ‘considerate’ in lending to real estate sector

16th November, 2008

The Hindu Business Line

Banks to be more ‘considerate’ in lending to real estate sector
The Hindu Business Line
Our Bureau
Mumbai, Nov. 16
Banks are expected to be more ‘considerate’ in lending to commercial real estate with the Reserve Bank of India removing the additional capital requirements for advances to this sector.
Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India and Chairman of the Indian Banks’ Association, said in keeping with the economic needs, the RBI has rightly relaxed the provisioning requirements to support the real estate and NBFC sectors. “We will be more considerate in terms of interest rates when clients from these segments come for roll-over of their credit lines.”
RBI on Saturday eased the capital requirements for bank advances to the real estate sector, NBFCs and capital market as part of a host of measurers to boost liquidity and enhance flow of credit.
Bankers said RBI’s move is a clear signal that banks must lend to real estate, which is facing a slow down in demand. While most bankers agree that there is a case for extending more credit to the real estate sector, they were not unanimous on the issue of pricing the credit.
Pricing issue
Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said RBI has given clear indication that banks must lend to the real estate sector. Pricing will depend on the funding cost. Earlier, banks were hardly lending to this sector because of the risk and the exposure limits. “Now we will lend. Pricing issue will come later. Over a period of time, it is possible that interest rates may come down.” Once prices reach more realistic levels, house-buying will pick up, he said.
Banking analysts, however, said they expect an increased flow of credit to the real estate at lower rates.
Mr M .D. Mallya, Chairman and Managing Director of Bank of Baroda, said both capital cost and provisioning cost have to be taken into account for pricing. For certain segments, where standard provisioning and risk weight were earlier increased, it has been brought down now. So appropriately, pricing would have to take this into account. This facilitates improved credit delivery to the sector and gives it greater flexibility for over all credit delivery.
Positive sign
Mr Keki Mistry, Vice-Chairman and Managing Director, HDFC, said the realisation (on the part of the central bank) that the real estate sector needs assistance itself is a positive sign. The employment generation in the construction sector is huge and a slow down in this sector first leads to unemployment of large number of workers.
Banks were reluctant to finance real estate sector; even “AAA” rated companies in the sector were finding it difficult to access bank credit. The Reserve Bank of India had raised the risk weight on bank advances to the commercial real estate sector from 100 per cent to 150 per cent. This was done at a time when the real estate prices were rising rapidly. And there were concerns on the asset quality. Now the situation has changed. The sector is witnessing a slow down.

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