Mumbai: The country’s largest lender State Bank of India (SBI) is seeing the sharpest growth in loans to the real estate sector—nearly double the industry average and much higher than that of private and foreign banks. Analysts caution that such a rapid pace of growth in this sector could lead to higher bad loans for SBI.
For the quarter ended September, SBI’s gross non-performing assets, or NPAs, grew to 4.19% of total assets, from 3.35% a year earlier, the highest in the industry.
Mint’s Dinesh Unnikrishnan says State Bank of India is seeing the sharpest growth in loans to the real estate sector and the over-exposure could lead to higher bad loans for SBI
The SBI group’s exposure to the real estate sector grew 43.4% in the fiscal year ended March to Rs 1.7 trillion from Rs 1.17 trillion against the industry growth of 23.2%. Real estate loans now account for 17% of the group’s total loans, up from 13.7% in the previous fiscal, according to Reserve Bank of India (RBI) data.
Compared with this, real estate loans account for 13.2% of the loan book of other state-owned banks. New generation private banks have a greater exposure to the real estate sector—26%—but the pace of growth has been slower.
In fact, the proportion of real estate loans as a percentage of total loans has declined or remained at the same level in the last one year for almost all banks in the system except for the SBI group.
SBI officials, however, downplayed the faster pace of growth, saying the majority of the loans in its real estate portfolio are less risky home mortgages.
“RBI is concerned primarily with commercial real estate and not with residential mortgage. In our case, commercial real estate is only around 1.5% of total loans or around Rs 15,000 crore in March. Hence this does not carry a concentration risk,” said A.P. Verma, the bank’s chief credit risk officer.
The commercial real estate portfolio fell to around Rs 9,195 crore in September. The home loan portfolio, at Rs 92,383 crore, is 12% of the total loan portfolio of Rs 7.9 trillion.
Analysts attributed the sharp rise in SBI’s overall real estate book to the lender’s controversial special home loan scheme or “teaser” loans.
SBI added around Rs 36,000 crore in home loans till the scheme was discontinued early this fiscal year in the face of stiff opposition from the banking regulator.
Teaser loans offer cheap rates in the initial years. RBI asked SBI to set aside more money for such loans, saying that customers may not be able to cope with the increasing repayment burden in subsequent years and loan defaults may rise.
Analysts said higher interest rates and the economic slowdown are likely to impact the ability of individuals to repay their home loans.
“In the banking industry, overall there are higher chances of defaults emerging from home loans due to the steep rise in interest rates and the adverse market scenario,” said Abizer Diwanji, head, financial services at KPMG India. “However, there is no need for ultimate loss as such loans are secured.”
RBI has raised its key lending rate 13 times since March 2010 to tame persistently high inflation.
Builders said prospective home buyers have postponed planned purchases. Poor demand and delays in securing approvals have resulted in a drastic drop in the number of new projects in recent months, they said.
“You are very likely to see more defaults from home loan borrowers in such a market. Already, many of the borrowers have sought restructuring of their loans,” said Anand Gupta, honorary treasurer at Builders’ Association of India lobby group. “Many borrowers, who had drawn home loans at a rate of 8-8.5% a year back, have now seen their repayment rates going up to 12-14% on account of successive rate hikes by banks.”
After setting aside money for bad loans, SBI’s net NPA ratio was brought down to 2.04% in September against 1.7% in the year-ago quarter. This level of both gross and net NPAs was last seen in September 2005. In absolute terms, SBI’s gross NPAs rose to Rs 33,946 crore from Rs 23,204 in the year-ago quarter.
Of SBI’s total NPAs, bad loans from mortgages stood at 2.38% of home loans in September.
Real estate is one of three sectors regarded as sensitive because of the high risk perceived in exposure to them. The other two are the capital market and commodities.
Traditionally, RBI has cautioned banks from taking higher exposure to real estate, citing the probability of defaults on account of volatility in prices.
Analysts said there is no immediate reason for panic. “Such a faster pace of growth is not good for any bank. However, there is no need for panic as there is little logic in factoring in home loans as ‘sensitive’ in a market like India. There will be a problem in the event of any further stress in the economy,” said an analyst with a Mumbai-based brokerage who did not want to be named.
Ashwin Ramarathinam contributed to this story.