RBI ask banks to go slow on credit to commercial real estate sector

The Reserve Bank of India had advised banks to go slow on credit to commercial real estate sector as the bank fears an asset price bubble in the sector. Credit to reality sector has increased by 20% to Rs 114676 from Rs 95659 last year. While the Central bank has observed that the NPAs in residential mortgages and commercial real estate increased by 19.8% higher than the overall growth of 14.8% in 2010-11.  The NPA expansion in commercial real estate sector was reeling 70.3 %, with public sector banks suffering most of losses.

The increased credits to commercial real estate sector in the last 12 months and expansion in non-performing asset (NPA) in the reality sector, which is above the growth in overall credit delinquencies, has raised the concerns of central bank. During last couple of weeks, apex bank had discussions with the top management of various banks and they were asked opinion on performance of the commercial real estate sector.

The central bank officials indicated that PSU banks should go slow on loans to commercial real estate due to an increase in NPAs amid slackening demand for such properties”. As per the RBI data, bank credit to commercial and real estate sector increased by 20% in the year ended May 30 compared to 1.2% growth in the last year.

Most of real estate developers are not going for outright sales and they are leasing properties because of valuation issues on the contrary banks prefer complete sales. This trend has been observed by the banks and they have communicated to the RBI.  Currently there is no limit on banks to exposure to real estate, however, central banks insists that banks should get internal limits approved by their boards. The increased interest rates is also expected to put pressure on the asset quality of banks that are aggressive in expanding real estate loans.