Banks told to cap realty exposure

The Reserve Bank of India (RBI) yesterday instructed banks to cap their exposure to the real estate sector.

In 2004-05, banks' aggregate exposure to real estate increased sharply by Rs 6,400 crore, or 61.4 per cent, to Rs 16,721 crore. The central bank has instructed banks to put in place a board-mandated policy in respect of their real estate exposure.

The policy could include exposure limits, collaterals to be considered and margins to be kept. The bank further stated that actual limits or margins could vary from bank to bank, depending upon the portfolio size, risk appetite and risk containing abilities of the bank.

The share of realty in the combined advances to the three sectors "" real estate, capital market and commodities "" increased from 51.3 per cent in 2003-04 to 61.6 per cent in 2004-05. The RBI stated that there is a need "to sensitise banks in this regard for their benefit".

"A recent review (of the RBI) revealed that though the advances of banks to the housing sector, particularly to the land developers and builders, are on the rise, a corresponding control mechanism required to be in place for managing the risks involved in this sensitive sector has not been adopted by majority of the banks," said the RBI's circular.

According to available data, scheduled commercial banks' lending to real estate constitutes more than 50 per cent of their total exposure to sensitive sectors.

The RBI has asked banks to adopt systems to contain risks, including that of prices, involved in the real estate sector.

The central bank has constantly been cautioning banks against increasing exposure to the sector since price volatility has a serious impact on their balance sheets.

Proper monitoring mechanisms are to be set up to ensure that policy stipulations are followed by field level functionaries.

With the competition growing in the housing finance market, concerns have been raised over its likely impact on the asset quality. Shyamala Gopinath deputy governor RBI had, in a recent seminar, stated that in today's competitive market, there may be some temptation to slacken the loan scrutiny procedures and this needs to be severely checked.

Banks have also been asked to report to the regulator on their real estate exposure in terms of direct exposure to residential mortgages, commercial real estate, investments in mortgage-backed securities (MBS) and other securitised exposures.

Banks would also have to disclose their gross exposure to the real estate sector in their balance sheet in terms of the above.

Many small private and public sector banks have exposure of over 30 per cent to the reality sector and any fall in property prices could led to depreciation in the value of the underlying security, putting exposures at risk, said banking sources.