The Hindu Business Line : Commercial realty loans turning costlier

Home Page - Housing Finance
Money & Banking - Public Sector Banks
Industry & Economy - Real Estate & Construction
Commercial realty loans turning costlier

Repricing done in view of rising default risk, say PSBs

C. Shivkumar

Bangalore, Aug. 16 The credit squeeze is still some distance away, but banks, particularly, those in the public sector, have pushed up lending rates to commercial realty above the current benchmark prime lending rates (BPLR).

Bankers said PSBs were pricing their loans to commercial realty upwards of 13 per cent. PSBs currently have BPLRs ranging between 12.75 and 13.5 percent. The move was taken to safeguard banks’ bottom lines. The bankers said the asset risks were on the rise, with escalating non-performing assets in the sector. Currently the NPAs in the realty are about 3.5 to 4 per cent of gross advances to the sector.

Bankers said the repricing to above BPLR was done to factor in the mounting risk element in realty sectors. Part of the risk, bankers said, was on account of the real estate developers contracting big ticket loans. The developers had transacted the loans in the hope of selling apartment blocks in urban clusters at sizeable profits. However, with banks tightening retail home loan disbursals and more stringent due diligence, developers have been unable to find buyers. Consequently, bankers said that there was fear of mounting delinquency on the commercial realty loans front.

The rate hikes for commercial realty loans were also in view of the high riskweightage assigned to the loans. Risk weightage on commercial realty sector is 125 per cent, and this would rise further after migration to Basel II. The banking sector is expected to become Basel II-compliant between March 2008 - 2009. Consequently, big ticket loans implied that the provisioning impact on the balance sheets would dent profits.

Subsequently, banks have pared their lending to realty sectors along with retail lending. This was also part of the portfolio rebalancing exercise prompted by the Reserve Bank of India and the Union Ministry of Finance early this year. Commercial realty loans are now barely 10 of the overall lending portfolios of banks.

Retail lending was only 18 per cent compared to about 30 per cent of the overall advances till last year.

Only the private sector banks were still continuing to expand their retail portfolios, in anticipation of lower lending risks. The preference for retail loans by private sector banks was largely driven by the low delinquency rates. In fact some of them have delinquency rates of less than one per cent in the retail loans. Moreover, the retail loans, bankers said, also helped defend the current net interest margins. Besides, under Basel II guidelines, retail loans had lower risk weightage of 75 per cent. Currently retail loans are risk weighted at 100 per cent. The bankers said, a reduction in the risk weighing of retail loans from next year, would enable some of the banks to unlock capital.