Bank credit allocation for construction sector up 50% in fiscal 2007

Bank credit allocation for construction sector up 50% in fiscal 2007

Mumbai: Construction companies have been the largest credit beneficiaries in 2006-07.

Bank credit allocated to the construction sector has gone up 50% from Rs13,303 crore in March 2006 to Rs19,907 crore in March 2007.

Industry-wide deployment of bank credit according to the latest figures posted by the Reserve Bank of India (RBI) show that deployment to the construction sector has been the largest compared with other industries such as iron and steel, metals and metal products, power, roads and ports, paper and rubber industry, where deployment has increased in the 20-30% range.

Bankers say construction as a sector has been booming. The advent of special economic zones and projects such as slum rehabilitation in Mumbai has led to banks lending more to construction companies.

R. Shankar Raman, executive vice-president, finance, at Larsen & Toubro Ltd—India’s largest engineering and construction company—says financing for construction companies cannot be restricted to banks alone, although they are the largest financiers of construction so far. “The construction sector is growing at the rate of 12-15% annually on a consistent basis," he says. “This logically means that they have to borrow money from multiple sources."

Typically, private sector lenders are more active than their public sector counterparts in this space. ICICI Bank Ltd is the largest lender to this sector, accounting for nearly 25-30% of the business, according to construction company experts. However, even public sector banks have increased their exposure to this sector over the past year.

A large Mumbai-based public sector bank, for instance, has nearly doubled its exposure to the construction sector from Rs398 crore in 2006- 2007.

A senior officer of the bank, who did not wish to be named, said that in the past, the bank had almost no exposure to the construction sector, but now with the sector witnessing a boom, the bank has doubled its exposure to construction. But the bank wants to play it safe and not lend much to the commercial sector projects, which has also been an area of concern for the central bank.

In January, RBI increased the risk weightage on commercial real estate projects from 100% to 150%. This means that banks are now required to mandatorily put away Rs12 for every Rs100 that they lend to the commercial real estate projects compared with the earlier requirement of Rs8. Construction companies fear the going may get tough in the days ahead with RBI clamping down on the real estate sector.

M.R. Jaishankar, managing director of Bangalore-based realty firm Brigade Group, says: “The banks tightened the norms after the risk weightage was increased." This could affect lending to the sector in the current fiscal, he adds.