RBI may tighten grip on realty further: E&Y

The Reserve Bank of India (RB) may tighten its grip on the country's real estate sector further in its forthcoming mid-term review of the monetary policy on October 30, according to Ernst and Young.

"With real estate prices continuing to appreciate, we foresee that the (RBI's) policy baton may tighten in the near future as well," E&Y said in a study on the real estate sector in the country.

This will leave real estate developers with little option but to resort to more expensive financing options, the consulting firm said.

Already concerned about the growing exposure of sceduled commercial banks (SCBs), the apex bank has clamped down on foreign debt into the real estate sector, hiking risk weight for home loans and increasing provisioning requirements of banks.

These measures have had some dampening impact on the housing demand, though overall absorbtion remains healthy. The measures have also helped to keep specualtors away from the market, it said.

Exposure of the SCBs to real estate sector grew by almost 80% in 2006 over the previous year, E&Y said, adding that the sector constitutes 91% of their lendings to sensitive sectors.

"With limited bank credit and restriction on infusion of foreign debt into the sector, going forward, financing real estate projects may become more challenging especially for developers with limited development experience and management background," E&Y said.

This will lead to more pressure on the profit margin of the real estate developers, who are already bearing the brunt of rising input and overhead costs.