RBI wants a fix on bad loans in realty
RBI now wants to have a fix on the level of bad loans in the banking industry, especially relating to home loans and commercial property.
By Preeti R Iyer & George Smith Alexander, TNN |
The Reserve Bank of India (RBI) has kicked off an exercise to gauge the extent of bad loans of banks in the real estate segment. Ever since RBI started tightening rates from end-2004 which forced banks to raise home loan rates, there have been reports of rising defaults.
Some of the top local banks have reported a rise in the number of bad loans in the realty segment as higher monthly repayment schedules started biting many borrowers.
RBI now wants to have a fix on the level of bad loans in the banking industry, especially relating to home loans and commercial property. It has commissioned a survey on bad loans in both residential mortgages and commercial real estate loans. The regulator has sought details on standard advances in the sector from banks for three fiscals — 2001-02, 2002-03 and 2003-04. RBI wrote to some banks on September 14, directing them to respond to queries by September 28, bankers said.
Banks have been told to furnish details of bad loans generated during 2004-05, 2005-06 and 2006-07. RBI wants banks to submit details of all such loans at the end of March 31, 2005, 2006 and 2007. The impact of a higher interest rate on borrowers and consequent default gets reflected only with a bit of a lag. Bankers reckon that this could be the reason for the regulator calling for data of loans which had originated a few years ago.
The latest exercise seems to be a follow-up on the meeting that RBI had with banks during the second week of September to discuss the impact of the subprime crisis in the US and Europe on Indian banks. RBI officials wanted to assess whether Indian banks had any exposure to such loans while attempting to gauge the impact of the crisis on the broader Indian economy. In fact bankers have been told to keep central bank officials posted of any developments, including marker rumours.
Commercial banks have, over the past four years, been lending aggressively to the real estate sector. In fact, for several banks lending to residential mortgages constitutes over 50% of their total retail exposure. Outstanding real estate loans for banks, according to RBI data, rose from Rs 13,546 crore in March 2005 to Rs 45,328 crore at the end of March 2007.
During the last couple of years, RBI has clamped down excessive lending by banks to the real estate sector on fears of an asset price bubble. While the RBI has placed fetters on exposure of banks to the capital market, in terms of a capping it at 40% of the previous year’s net worth of the banks, no such restrictions apply to lenders when it comes to real estate.
According to a senior banker with a private bank, despite a higher risk weightage imposed by RBI, the central bank is of the view that there has actually not been a slowdown in loans to the sector. Hence, the regulator has decided to engage banks on this issue in an effort to nudge them to go slow on funding realty.
In January 2007, the central bank raised the provisioning requirement to 2% for standard assets in the real estate sector, outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans (excluding residential housing loans).
In April 2006, RBI hiked the provisioning for standard advances 1% for personal loans, capital market exposures, residential housing beyond Rs 20 lakh and commercial real estate loans. It also increased the risk weight on exposures to commercial real estate to 150%.
Some of the top local banks have reported a rise in the number of bad loans in the realty segment as higher monthly repayment schedules started biting many borrowers.
RBI now wants to have a fix on the level of bad loans in the banking industry, especially relating to home loans and commercial property. It has commissioned a survey on bad loans in both residential mortgages and commercial real estate loans. The regulator has sought details on standard advances in the sector from banks for three fiscals — 2001-02, 2002-03 and 2003-04. RBI wrote to some banks on September 14, directing them to respond to queries by September 28, bankers said.
Banks have been told to furnish details of bad loans generated during 2004-05, 2005-06 and 2006-07. RBI wants banks to submit details of all such loans at the end of March 31, 2005, 2006 and 2007. The impact of a higher interest rate on borrowers and consequent default gets reflected only with a bit of a lag. Bankers reckon that this could be the reason for the regulator calling for data of loans which had originated a few years ago.
The latest exercise seems to be a follow-up on the meeting that RBI had with banks during the second week of September to discuss the impact of the subprime crisis in the US and Europe on Indian banks. RBI officials wanted to assess whether Indian banks had any exposure to such loans while attempting to gauge the impact of the crisis on the broader Indian economy. In fact bankers have been told to keep central bank officials posted of any developments, including marker rumours.
Commercial banks have, over the past four years, been lending aggressively to the real estate sector. In fact, for several banks lending to residential mortgages constitutes over 50% of their total retail exposure. Outstanding real estate loans for banks, according to RBI data, rose from Rs 13,546 crore in March 2005 to Rs 45,328 crore at the end of March 2007.
During the last couple of years, RBI has clamped down excessive lending by banks to the real estate sector on fears of an asset price bubble. While the RBI has placed fetters on exposure of banks to the capital market, in terms of a capping it at 40% of the previous year’s net worth of the banks, no such restrictions apply to lenders when it comes to real estate.
According to a senior banker with a private bank, despite a higher risk weightage imposed by RBI, the central bank is of the view that there has actually not been a slowdown in loans to the sector. Hence, the regulator has decided to engage banks on this issue in an effort to nudge them to go slow on funding realty.
In January 2007, the central bank raised the provisioning requirement to 2% for standard assets in the real estate sector, outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans (excluding residential housing loans).
In April 2006, RBI hiked the provisioning for standard advances 1% for personal loans, capital market exposures, residential housing beyond Rs 20 lakh and commercial real estate loans. It also increased the risk weight on exposures to commercial real estate to 150%.
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