The Reserve Bank of India may step up its efforts to pre-empt another bubble in the local property market by increasing the cost of funds for the commercial real estate sector by up to 200 basis points.
According to an RBI official, “We are looking at a hike in the risk weight to the commercial real estate segment to 125% as a measure to ward off another bubble in the real estate segment and to ensure high credit quality”.
These days interest rates on most of the loans are between 7.5% and 12.5%, depending on the credit rating of the borrowing company. The current move will make loans to this segment costlier by 75-200 basis points.
Bank finance for land development is classified as CRE if the source of repayment would be lease rentals. The segment has started showing signs of revival after an earlier-than-expected recovery of the country’s economy from a demand slump.
The measure could affect the financial health of some of the largest real estate firms of the country, which were forced to sell land banks and projects to meet their cash requirements. A similar move by the RBI in 2007 had resulted in a crash in property prices. Though the central bank was criticised for the measure, the global financial crisis in 2008 proved that it was a step in the right direction.
Till mid-November last year, the risk weight to loans secured by commercial real estate was 150%, which was brought down to 100% by the banking regulator to facilitate credit flow to the sector that was reeling under a demand slump.
High exposure of some banks in the segment may have prompted RBI to consider such a measure, said the chairman of a government-run bank. “A major chunk of the non-food credit off-take in the recent months went to the real estate segment,” he said, requesting anonymity. However, an increase in risk weight by 25% points will have only limited impact, he added.