Ground reality: RBI hikes realty weightage

With the regulator raising the risk weightage for lending to real estate developers, industry watchers hope that there will be curtains on the speculation that seems to be fuelling the market. The increased risk-weight will ensure a real estate project is well structured in terms of debt-equity ratio and tenancy agreements to mitigate risk.

Nageshwara Rao, head commercial banking, IDBI, said: "The increase in risks weights will prompt greater caution in evaluating credit to real estate and capital market sectors."

Added Ajay Mahajan, president, financial markets, Yes Bank: "The increase in risk weight on mortgage-backed securities will prevent banks from unduly churning their housing loan portfolios. This will prevent the total risk in the system from increasing as there will be caution in selling housing loan portfolios to release capital for generating new business opportunities."

Realtors too heaved a sigh of relief that the RBI's move will put a stop to the speculation fuelled by sky-rocketing land prices.

Said Niranajan Hiranandani, CMD of Hiranandani Constructions, "The RBI has responded to exorbitant prices that some developers have been paying for the mill lands of central Mumbai. The land prices have been pushed up without any reason, so there is a lot of speculation in the market now and that is what the RBI wants to control."

Added Anuj Puri, CEO of Chesterton Meghraj, real estate consultants, "This is a warning to commercial banks that the current land prices may not be sustainable in the long run."

Since March this year, mill lands of NTC have been fetching prices far in excess of industry expectations. First it was the Jupiter Mill land which went for Rs 260 cr when the market pegged the value at Rs 150 cr, followed by the Mumbai Mill land which was picked up by DLF for an unheard of Rs 702 cr.

Several Mumbai realtors including Hiranandani had walked away from that auction claiming that the bids were unrealistic. And finally , the Elphinstone and Kohinoor mills went for Rs 441 and 421 cr, respectively.

The RBI move, while cautioning banks against unchecked lending, is not likely to apply the brakes on developments.

"The RBI increasing risk categorisation will mean that every project's credit appraisal will become more stringent. It is a not a directive to not invest," said Arun Goel, CEO, DHFL Real Estate Venture Capital Fund.

He said with the current level of liquidity in the market, banks do not have too many avenues for investment any way and, therefore, would have to continue servicing the real estate sector's borrowing needs.

While there is a lot of private equity funding available in the market now, developers work mainly on a debt model and continue to go to banks for the debt component of a project. This is something Goel points out will not change regardless of the weightage attached to lending, as no debt funds are available to real estate sector yet.

Both Puri and Goel agree that the final cost of lending will be borne by the end user. Said Puri, "The builder will pass additional cost to final buyer. But the increase, which works out to around 2 per cent, is not enough for the buyer to apply the brakes either."

Among commercial banks, ICICI (Rs 2,517 crore), Bank of India (Rs 2,428.33 crore), Punjab National Bank (Rs 1,781 crore), Oriental Bank of commerce (Rs 1,298 crore) and United Bank of India (Rs 855 crore) have the maximum exposure to real estate sector.

Chanda Kochhar, executive director of ICICI Bank, said, "ICICI's exposure to commercial real estate and capital market is about 3 per cent each, of the total loans and advances. As a result, impact would not be significant and is expected to be in the range of 7 to 8 basis points on capital adequacy."