Mumbai: Commercial banks have started shying away from lending to an overheated real estate sector and the volatile capital markets.
After almost doubling their exposure to commercial real estate in 2006-07, public sector banks, which account for more than 70% of the Indian banking industry, have grown their advances to this sector in the first three months of 2007-08 by just 1.93%. Their exposure to the capital market sector rose by 6.53% in the quarter against 79.34% in 2006-07.
“We are merely doing what the Reserve Bank of India (RBI) wants us to do,” said the chairman of a public sector bank who did not wish to be identified. In the past year, RBI hiked its policy rates five times and raised the balance commercial banks need to keep with it by two percentage points, draining more than Rs55,000 crore liquidity from the banking system in an effort to rein in high credit growth.
And the tight monetary policy has started to yield results. Bank credit, which grew by about 31% for three years running, is slowing down. As on 20 July, bank credit has grown by 23.7% year-on-year, sharply down from 31.7% a year ago.
RBI wants to bring down credit growth to 25%. It is particularly against the banking sector lending aggressively to the commercial real estate sector as it feels that the real estate bubble may burst and banks may land themselves in trouble. Over the past two years, property prices have gone up by as much as 60-80% in Indian metros. The central bank has raised banks’ provisioning requirement as well as risk weight for their exposure to commercial real estates in the past one year.
Changing Exposure Profile (Graphic)
A Mixed Bag (Graphic)
“We don’t see any risk (in lending to this sector) but the regulator does not want us (to lend). With real estate prices going up, the value of properties are going up and hence loans are safe, but who can go against the regulator?” asked a private banker who did not wish to be identified.
Figures of private banks’ exposure to the real estate sector are not available but the aggregate exposure of 28 public sector banks to the sector as a proportion of their net credit has grown only marginally, from 3.06% in March 2007 to 3.15% in June. In 2006-07, it had risen by more than one full percentage point—from 2.5% to 3.6%.
In absolute terms, the exposure of public sector banks to this sector has gone up by only Rs859 crore in the April-June quarter. In contrast, last year, their exposure to commercial real estates had risen by Rs21,468 crore—from Rs23,053 crore in March 2006 to Rs44,521 crore in March 2007. Some public sector banks actually cut their exposure to this sector. For instance, Bank of Baroda, which had raised its lending in commercial estates by 469% last year, has pared it by 54% in the first quarter.
The worst affected, says Aashish Kalra, co-founder and managing director, Trikona Capital, a New York-based India-focused real estate fund, are small- and mid-level developers because it is these firms “looking to grow to the next level that look for credit.”
“By putting a squeeze on credit to this sector, RBI has ensured that this second rung does not have money,” he said.
RBI treats commercial real estates as a “sensitive sector” to which banks should not have high exposure. The two other sensitive sectors are the capital market and big non-banking finance companies who normally borrow funds from banks and or further lend them to brokers in the form of margin financing for their stock market play. In these two sectors, too, there has been a substantial slowdown in the flow of bank credit.
For instance, public sector banks’ exposure to capital market rose by a meagre 6.53% in the April-June quarter against 79.34% in 2006-07. In absolute terms, their exposure to capital market has gone up from Rs10,052 crore in March to Rs19,707 crore in June. Last year, it had risen from Rs5,605 crore to Rs10,052 crore. Overall, exposure of public sector banks to capital market as a proportion of their net advances in June stood at 0.74%. Facilities such as loan against shares constitute bank’s exposure to capital market. RBI has capped this at 5% of a bank’s total advances but this ceiling has been waived for select banks such as ICICI Bank and HDFC Bank, among others, who can take higher exposure to capital market. Most public sector banks shy away from this business.
The public sector banks’ exposure to NBFCs actually dropped in the first quarter of 2007. In 2006-07, there was a more than 60% rise in this business—taking the outstanding bank loans to NBFCs from Rs16,427 crore to Rs26,400 crore but in the first three months of the current fiscal year, it has come down to Rs24,541 crore.
Overall, the aggregate exposure of public sector banks to sensitive sectors as proportion of their net credit has gone up marginally, from 5.57% at the end of March to 5.59% at the end of June. In absolute term, however, it has declined from Rs80,973 crore to Rs80,628 crore. During this period, their overall net credit went down from Rs14.54 trillion to Rs14,42 trillion.
Gayatri Ramanathan contributed to this story.