The finance ministry will meet chief executives of leading banks tomorrow to discuss credit flow to the real estate and housing sectors.
D K Mittal, secretary of financial services, will chair the meeting of bankers, which will take stock of credit flow to the sensitive sectors. “The entire gamut of real estate financing will be discussed. In an earlier meeting with bankers, the finance minister had expressed concern over real estate developers not bringing prices down despite slowdown in sales,” said a senior executive of a public sector bank.
Following the finance minister’s concern, a committee of bankers was set up to study the issues in the real estate sector. The panel, headed by Ajai Kumar, chairman and managing director of Corporation Bank, is expected to give its report by month-end. Mittal will also attend the meeting of the sub-committee of the Financial Stability and Development Council (FSDC) at the Reserve Bank of India (RBI). The sub-committee is headed by RBI Governor, D Subbarao, in which all financial sector regulators are members. RBI deputy governors also attend the FSDC sub-committee meetings.
Bank credit to commercial real estate has slowed considerably in the last one year. It contracted 1.8 per cent during April-July against 4.4 per cent growth in the comparable period of the previous year. Growth has also slowed on a year-on-year basis, as loan growth to this sector was a mere 2.2 per cent for the year till July, compared with 18.6 per cent growth a year ago.
Similarly, home loan growth has slowed, latest data from RBI showed. During April-July, home loan growth was 3.1 per cent against 4.5 per cent last year. According to bankers, the high interest environment has slowed home loans significantly. The finance ministry under P Chidambaram has taken steps to correct the situation. In a meeting with bankers in August, shortly after Chidambaram took charge, bankers were asked to boost consumer loan demand by lowering interest rates. Following the meeting, most banks had reduced interest on home and automobile loan demand.
Bankers have said the meeting assumes significant following the big-bang reform announcements last week, which exhibit the government’s intention to boost the faltering economic growth. Last week, the government opened the floodgate for foreign direct investment in multi-brand retail and aviation and increased the price of diesel, despite stiff opposition from some of its own allies.
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The government is also keen to see interest rate become conducive to support economic growth.
All eyes will be on RBI tomorrow, when the mid-quarter policy review is scheduled. The central bank has not reduced the interest rate in the last two policy meetings, citing high inflation and lack of the government’s intention to correct fiscal and current account deficits.
The twin deficit also put upward pressure on inflation, the central bank had said. After increasing diesel price and relaxing the FDI norms, the government has shown its intention to control the twin deficits.