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Banks tighten norms for loans to real estate firms

Sunny Verma, New Delhi, The Financial Express

May 03, 2011

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Inflation management by RBI coupled with tight liquidity situation has put a squeeze on bank credit to the real estate sector. Banks have tightened lending to real estate companies fearing possible defaults on repayments and increased risks perception of developers amongst lenders. Commercial banks have not only doubled the collateral requirements for real estate companies but also charge higher interest from these companies to protect their loans.

 

Lenders are asking for security or collateral of at least 300% — up from 150-200% until recently — while lending to even top notch realty companies, bankers said. In addition, the real estate companies seeking bank finance are able to borrow funds at hefty 15% plus, they said. Interest rate charged to blue chip companies is much higher compared to lending rate of PSBs to their prime clients in other sectors, wherein funding is available at starting rate of 9.5-10%.

While rising policy rates by RBI have pushed up debt costs, a deteriorating credit worthiness and increase in unsold inventory across markets have resulted in a sharp jump in interest costs for the real estate sector.

“We now take at least 300% security to finance new projects of real estate companies. Plus we also examine the viability of the projects being undertaken. The security used to be 150% (a few month) earlier. Even the interest rate charged to real estate companies has gone up to 14% plus,” said Indian Bank CMD TM Bhasin.

“I do not think there is any signs of a crisis but real estate companies are holding onto their inventories. There needs to be a price correction,” Bhasin said. Official of another PSB, who asked not to be named said, no bank is lending to realty companies without getting at least 250% collateral. Total bank credit to commercial real estate sector rose by 21.4% to R111,836 crore in 2010-11, against a deceleration of 0.3% in 2009-10, as per RBI data.

State Bank of India chairman Pratip Chaudhuri said real estate is a lucrative sector for the banks but at relatively higher rates. “The Reserve Bank of India has increased the provisioning rate and the capital adequacy requirement for the real estate companies. But banks are not staying away from real estate companies,” he said.

“Wherever there are good projects, I do not think funding is a problem. The issue is the cost. Real estate companies willing to pay 13-14% they find money. If they are willing to pay only 11-12% then the supply (of credit) is the issue,” Chaudhuri said.

Real estate developers are expected to face large-scale distress as their borrowing cost rise and credit availability declines, according to real estate consultancy company Knight Frank. Developers will have to repay R1.8 lakh crore of debt to PSBs, private-equity funds and other lenders over the next two-three years, as per a Bloomberg report quoting Knight Frank. This may force developers into fire sales of assets, it said.

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