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ICICI, Kotak, Yes Bank swell up realty exposure

Manju AB, Financial Chronicle

June 19, 2011


As India’s central bank continues its vigil on fund flow into the property market, banks have sharply increased their exposure to real estate firms. ICICI Bank has a whopping Rs 25,094 crore exposure to real estate firms in 2010-11, an increase of 85 per cent over the earlier financial year ended March 2010. This is followed by smaller players such as Yes Bank, Axis Bank, Kotak Mahindra Bank and Bank of Baroda.

The cash-starved realty companies are agreeing to cough up higher rates of interest to repay old debts or raise fresh debt as they struggle to finish off incomplete projects. The option of equity financing is nearly dead in property market.

Commercial real estate exposure in banking parlance means credit given to property developers for developing a project.

Growing its exposure at a much slower pace is State Bank of India, with a 4.2 per cent rise to Rs 14,011 crore for the financial year ended March 2011. This excludes home loans, finance to housing finance companies, National Housing Bank and other mortgage-backed securities.

Crippled by muted demand and an overhang of supply, real estate developers have defaulted to banks and contributed to higher non-performing assets, according to RBI. Of the total non-food bank credit of Rs 36,77,429 crore, about Rs 1,14,550 crore is to the real estate companies. This figure doesn’t include home loans and loans to housing finance companies and mortgage-backed securities and Rs 1,73,944 crore to NBFCs that is under RBI watch for possible diversion to the real estate indirectly from the banking sector.

Explaining the gravity of the situation, a senior Axis Bank official told Financial Chronicle on the condition of anonymity, “The exposure to real estate is the offshoot of the rise in demand for finance from the sector as there are a lot of commercial places being developed for BPOs and for the IT sector.”

“Though our NPAs are negligible, bad loans are fast forming as there are unsold capacities in Gurgaon, Hyderabad and Chennai,” said the official.

An e-mail questionnaire sent to ICICI Bank went unanswered.

Developers anticipated a bigger demand and also higher rental, both of which have not happened. JP Morgan said in a recent research report, “Developer loans increased by 85 per cent year-on-year, but management maintained that most developer exposure is to large developers, with low loan to value (LTV) and limited exposure to smaller developers.”

According to RBI, the new private sector and foreign banks increased their commercial real estate exposure by 59 and 69 per cent respectively, a rate much higher than the single digit growth rate witnessed by the other two bank groups. The rate of growth of NPAs in this segment at 19.8 per cent was also higher than the overall NPA growth rate of 14.8 per cent. In particular, the NPAs in the commercial real estate segment grew at 70.3 per cent as at end March 2011, most of the impairment taking place in public sector banks.

Rajat Monga, treasury group president (financial markets), CFO, Yes Bank, said, “We fund only special purpose vehicles (SPVs) of companies. The land is generally mortgaged to the SPV and we have customer advances coming into the SPV; the revenues flowing to the SPV are escrowed making it quite stable financing. We have hardly any NPAs from the sector.”

While Unitech and DLF have the largest exposure to banks, a large number of unlisted developers have also managed to take out finance from the banks, particularly the public sector banks.

A few other banks such as HDFC Bank and Punjab National Bank have consciously brought down their real estate exposure. A senior PNB official told FC, “We achieved this by asking the developers to prepay some of their loans for which we gave some interest rate concessions.” Among foreign banks, Standard Chartered Bank has been active in the real estate market, providing finance to project developers, say bankers.