Banks skirt norms to finance realty

Some banks are camouflaging their lending to small, unknown real estate developers to skirt stringent capital adequacy and provisioning requirements.

The banks are classifying loans to lesser known developers as general corporate purpose loans and not showing them as exposure to commercial realty sector.

In addition to skirting the stricter prudential norms, they also make gains in the home loans business as they have tied up with the developers as a result of which, they cross-sell products to the borrowers. Also, the yield on loans to these real estate developers is high, banking sources said.

The banks' exposure to the commercial real estate sector has come under the scrutiny of the Reserve Bank of India (RBI) with the year-on-year growth being over 100 per cent.

Real estate loans by the banking sector rose 100.6 per cent to Rs 13,380 crore in 2005-06 on top of a-136.7 per cent increase to Rs 7,622 crore in 2004-05.

The growth seems bloated because of the low base of real estate loan portfolio but what worries the RBI is the pace at which it is growing.

Bankers however believe that the realty sector is not entirely dependent on their finances. Many of the foreign firms and private equity funds from South East Asia and Middle East have been actively funding the real estate sector in India.

Since most of these funds are in the form of short-term investments, there are chances of them going out as well if the high real estate prices are unsustainable in the long run. Unsustainable prices and failure of projects will affect the bank exposure, which may in turn have a systemic impact.