Real estate builders likely to feel the heat of rising loan rates
By Joseph Samson
Apr 14, 2010
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Realty loan rates may take a rise making borrowing expensive for builders. It is likely that RBI may ask banks to set aside more capital for loans to real estate projects. If this happens then banks would be in need for higher capital which would compel them to raise rates of such loans.

It is expected by senior banking officials that RBI may either rise the standard provisioning or risk weight on loans to the real estate companies in its monetary policy announcement coming up this April 20.

Standard provisioning is the money that banks set aside from their earnings on standard loans to protect their books if the borrower defaults.

Experts have said that a rise in loans by 2% would affect the realty sector. However, RBI's step would be a protective measure to reduce the risk exposure of banks in real estate loans in a scenario of sky scrapping prices.

"If RBI does not raise cash reserve ratio and keep signaling rates like repo rate and reverse-repo rate untouched, my feeling is that it may tighten the prudential norms. A hike in risk weight, particularly on real estate loans, is not ruled out," said SA Bhat, chairman and managing director of Indian Overseas Bank.

Capital adequacy ratio is calculated on the basis of risk weights. All banks are required to maintain a CAR of 9%. The risk weightage is directly proportional to the credit worthiness of the borrower. For a triple A clients, the risk weight is 20%, which means banks have set aside Rs 1.80 of its own capital for every Rs 100 loan to such borrowers.

But irrespective of the rating, risk weight for real estate companies is 100% which means banks have to keep aside Rs 9 for every Rs 100 loan to builders.

"Government and banks bailed out real estate companies by providing financing to them. The growth in this sector was higher than the overall credit growth, as a result, prices did not come off significantly. Revival in the sector has resulted in real estate prices rising and now RBI may need to make an effort to cool down prices," said Hemindra Hazari, head of research Karvy Stock Broking.


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