Mumbai: Indian banks’ lending to the high-risk real estate sector has gone up sharply over the last five years, but bankers rule out the possibility of a systemic problem, saying the portion of funds flowing into the commercial real estate sector is relatively low and the lending is done in compliance with prudential norms.
Banks’ exposure to commercial real estate, as a percentage of total loans, for a majority of the banks rose as much as five times for lenders such as HDFC Bank Ltd and Axis Bank Ltd during the last five years.
The exposure of most of the banks to the sector rose to 11-24% of total advances at the end of March compared with 3-7% at the end of fiscal 2006, according to data compiled from the annual reports of banks.
In the case of the largest private sector lender, ICICI Bank Ltd, this has risen to 35.25% from 29.71%.
The figure has more than doubled for state-run banks such as State Bank of India (SBI), IDBI Bank Ltd, Punjab National Bank, Bank of Baroda, Central Bank of India and Union Bank of India, the data showed.
However, according to sector analysts, lending to commercial real estate contributes only 2-4% of the total real estate loans of banks, and majority of the lending is to the salaried class for purchasing residential mortgage properties, which are considered to be relatively safer on account of lower defaults.
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Among the banks, SBI had the largest exposure to real estate at Rs 87,125.16 crore as of 31 March, followed by ICICI Bank’s Rs 63,870.73 crore.
The Central Bureau of Investigation (CBI) on Wednesday said it had busted a loan-for-bribes racket, arresting several people, including executives of state-run banks and the chief executive officer of LIC Housing Finance Ltd for giving loans to private builders after taking bribes.
Industry officials said the episode wasn’t a threat to the banking system as a whole. Also, banks are unlikely to reduce their exposure to the real estate sector on account of the scam, they said.
“Commercial real estate is a small portion of our real estate book, in the range of 2-3%. We are mainly targeting the home loan market as they are more safer. I will definitely say it is a one-off case. There is no systemic issue nor any concern,” said Sushil Muhnot, executive director of IDBI Bank.
Real estate advances comprised 22.44% of the bank’s total as of 31 March.
According to a report by Edelweiss, the loan scam is unlikely to pose any systemic risk to asset quality as the charges are confined to the “exposed” companies and financiers, and the quantum of money involved is “minuscule”.
Reflecting its concern on banks’ exposure to sectors such as the capital market, real estate and commodities, the Reserve Bank of India (RBI) has categorized these as sensitive. It has fixed the risk weight for commercial real estate at 125%.
The exposure of new private sector banks in these sectors was as high as 31% of their total loan book in fiscal 2010 while that of public sector banks was 16%. The exposure of foreign banks was as high as 32.4%. It continues to be strong in the current fiscal year, analysts said.
“Increased cash flows to the real estate sector definitely have the potential to push up real estate prices and could lead to a bubble. Hence, this is something which needs to be monitored closely,” said Soujanya P., group head, public sector bank ratings, Credit Analysis and Research Ltd.
In its mid-term policy review on 2 November, RBI capped the loan-to-value ratio for housing loans at 80% and raised the risk weight to 125% for loans of Rs 75 lakh and above.
But analysts warn the higher exposure to real estate could trouble banks if there is any reversal in fund flows and a crash in property prices.
“The rise in the exposure of banks to sensitive sectors is a matter of concern, especially to the real estate sector, as a correction appears imminent in the commercial real estate market,” said Suresh Ganapathy, head of financial research at Macquarie Securities Group.
If foreign flows reverse, prices in these segments could tumble quickly, leading to losses or requiring additional provisioning to cover the risk. This will hit the bottom line directly, according to analysts.
Stock prices and real estate valuations have been shooting up, driven largely by cheap foreign money looking for investment opportunities. This year so far, foreign institutional investors have bought shares worth a net $28.42 billion (around Rs 1.3 trillion), driving the Bombay Stock Exchange benchmark index to an all-time high of 21,000.
According to the latest RBI data, Indian bank lending to real estate in the year ended March rose by an overall 10.4% from the year previous.
On Thursday, finance minister Pranab Mukherjee directed all public sector banks, financial institutions and insurance companies to look into their exposure to the companies mentioned in the case, besides asking them to carry out an independent evaluation on asset quality, documentation and compliance.
An official of a state-run bank said the rise in loans to real estate is also due to the change in the definition of the sector over the past five years. Loans for the construction of schools and hospitals are now considered realty loans.
“There is a possibility that lending by some banks have gone up a little aggressively. Although real estate has its own inherent risk, I don’t think the scam has put the sector in a bad light,” the official said. He did not want to be named as he is not authorized to talk to the media.