RBI bars some banks from new realty loans

Central bank cautious as exposure to real estate sector doubles.

The Reserve Bank of India (RBI) has asked some commercial banks not to sanction fresh loans to the real estate sector. This it has done in view of soaring property prices. But these banks can disburse loans for which they have already given in-principle approvals.

The exposure these banks have been asked to stay away from does not include retail housing loans. It is mainly for loans to builders and contractors.

"The RBI does not want these banks to be caught in a real estate price bubble. The measure is to protect banks from a crash as the banking sector's exposure to the sensitive real estate sector has almost doubled from what it was a year ago," a banker told Business Standard.

The RBI had directed banks that had sizeable exposure to the real estate sector not to overstretch themselves, sources said. Commercial banks' aggregate exposure to the real estate sector on March 31, 2005 was Rs 26,600 crore.

Banks have been cashing in on real estate lending as property prices have shot up by 25 per cent this year.

Given the risky nature of this business, the RBI is of the view that banks do not have an adequate risk management system in place to handle the volatility of this sector. This rationale might also extend to other volatile sectors like the commodity markets, a public sector bank executive said.

The RBI had, sometime back, asked commercial banks to report all exposure above Rs 15 lakh in both home loans and commercial lendings as it is concerned over a sharp rise in property prices.

The RBI has also recently raised the risk weighting of home loans from 75 per cent to 100 per cent. This has ensured a higher capital allocation for home loans.

'The RBI feels that banks do not have a control mechanism in terms of a risk management system corresponding to the increase in their exposure to the real estate sector,' sources said.

Observers point out that the real estate market is still highly unorganised and the industry players continue to deal in black money as some of them do not accept full payments in cheques.

'Even today, the real estate market is unorganised in India with a component of unaccounted money. This implies higher risk in lending to this sector,' another public sector bank executive said.

A private sector bank executive interepreted the RBI move as part of its attempt at preventing banks from increasing their exposure to three sensitive sectors -- the capital markets, real estate and commodities -- in an unsustainable manner.