Mint Rd warns of realty bubble

Volatility in realty prices and a demand-supply mismatch could lead to a realty bubble, according to the Reserve Bank of India (RBI).

The central bank has cautioned banks against increasing exposure to real estate, stating that volatile prices could have a serious impact on their balance sheet.

Many small private and public banks have exposure of over 30 per cent to the realty sector and any fall in prices could lead to a depreciation in the value of the underlying security, thus putting exposures at risk, a banking source said.

"Real estate prices have jumped by over 30 per cent in the past two to three months and an correction is imminent," said a real estate analyst.

Scheduled commercial banks lending to real estate constitutes more than 50 per cent of their total exposure to sensitive sectors. Banks' exposure to real estate as in March 2004 increased by 12 per cent to Rs 14,170 crore against Rs 12,464 crore in the corresponding period last year, said the RBI in its report on trend and progress in banking in India 2003-04.

Recent data reveal that non-priority sector housing loans outstanding as on February 18, 2005 were around Rs 74,000 crore, which is, however, only 8.0 per cent of the gross bank credit, said the RBI.

RBI deputy governor Shyamala Gopinath in a seminar last week said that with growing competition in the housing finance market, there has been a growing concern over its likely impact on the asset quality.

In a fiercely competitive market, there may be some temptation to slacken the loan scrutiny procedures and this needs to be severely checked, she added.

"ICICI Bank has intentionally been selective in its exposure to real estate," said Chanda Kochhar executive director. ICICI Bank has less than 5 per cent exposure to real estate, Kochhar said.

"We have exposure to select renowned developers hence there's no question of the portfolio going bad," said the managing director of a private bank.

"Our exposure to real estate is around 3 per cent even as other players have an exposure of over 30 per cent," he added.

"There was no immediate concern on the health of banks realty portfolio it would be advisable if banks conduct a stress test of impact of movement of real estate on their balance sheet," said RBI sources.

"Banks with over-exposure to a particular developer could run into trouble if the developer does not have firm commitments from retail chains," he added.

"UTI Bank has an exposure of less than 2 per cent to real estate," said R Asokkumar, president-credit, UTI Bank.