Some banks recall loans to realty firms

Private equity firms line up $13.5 billion.

Heeding Finance Minister P Chidambaram's call to moderate credit growth to overheated sectors like real estate and personal loans, some public sector banks are even considering revoking loans already sanctioned to real estate companies, leaving the field open for private equity.

"We are not releasing, wherever possible, funds for projects that have already been sanctioned, apart from trying not to undertake new commercial real estate exposures," a senior functionary in a public sector bank said.

"Our exposure to the (commercial) real estate sector has in fact slightly reduced (over the March 2006 level), " added the executive director of another public sector bank.

In a meeting with public sector bank chiefs last month, Finance Minister Chidambaram had asked them to moderate lending to overheated sectors and instead focus on lending to small and medium enterprises and the agricultural sector.

Concerned at the pace of growth of bank credit to real estate companies, the Reserve Bank of India had recently raised the risk weightings for capital adequacy purposes and provisioning requirements for such exposure.

In spite of the squeeze on bank credit, the real estate sector looks awash with funds like private equity stepping in to fill the gap.

Ever since foreign investment norms were relaxed in February 2005, foreign funds worth almost $13.5 billion had been raised for investing in the domestic real estate market.

According to estimates by real estate consultant Cushman & Wakefield, of this amount, nearly $1.5 billion has already been committed to specific realty projects and to the equity of various real estate companies like Mantri, Alpha G Corp, among others. More than 60 per cent of this money ($1.5 billion) has been committed only in the last six months.

In addition, domestic funds have raised over $2 billion so far and almost 50 per cent of this money has already been committed.

"While banks cannot finance land acquisitions, private equity has helped developers bridge the gap," said Sandeep Singh, vice-president (capital markets group), Cushman & Wakefield India.

Indian developers are also raising equity by listing themselves on the London Alternative Investment Market.

Through this route, Hiranandani Constructions has raised £382.6 million, Unitech £360 million and K Raheja Corp £180 million.