RBI readies to prick upcoming ‘realty bubble’

Duvvuri Subbarao, the Reserve Bank of India (RBI) governor, left key interest rates unchanged in the second quarter monetary policy review. However, by tweaking a few provisions, he signaled his focus on controlling asset prices and monetary inflation. 

“The RBI has focused on controlling asset prices and inflation by using alternative measures instead of hiking interest rates since sustainable signs of economic growth are not yet fully visible and credit growth has not picked up meaningfully,” said Vikram Kotak, chief investment officer, Birla Sun Life Insurance.

The RBI raised the provisioning requirement for loans to the commercial real estate sector to 1% from the current 0.4%. What this means is that banks, which so far had to set aside Rs4 as provision for every Rs1,000 loan to real estate companies, will now have to keep aside Rs10.

This underlines the RBI’s concern over the growth in loans to real estate firms.

For a one-year period till August 28, 2009, banks had lent Rs28,353 crore to the real estate sector, up 41.5% in comparison to the same period last year. In contrast, home loans amounted to Rs14,668 crore, up by only 5.4% over the same period last year.

These loans have helped developers keep the prices up, even in a relatively weak market. “The central bank will have to keep a vigil on any an asset bubble building due to excess liquidity,” said Navneet Munot, chief investment officer of SBI Mutual Fund. Harsh Roongta, CEO, Apna Paisa, added: “It (the move) will serve to increase the cost of landing to the real estate sector. It is possibly a welcome step to ensure that no bubble gets built up based on loans.”

The stock market did not take kindly to the change. The 30-share BSE Sensex ended the day 387.1 points, or 2.31%, down to close the day at 16353.40 points. Bank and realty stocks fell even more, with the 18-share BSE Bankex falling 3.8% and the 14-share BSE Realty Index falling 6.24%.

Big developers haven’t liked this move either. “Increasing, the risk weightage for commercial real estate is a negative signal, and is perhaps not required at this early stage of economic revival. If the same had been pushed down a few quarters later, it would have been better,” said Rajeev Talwar, executive director, DLF Ltd Group. He felt the move would discourage developers from going ahead with commercial projects. “To send a negative signal to any segment of the realty sector is not called for at the moment,” he said.

Industry experts believe that the move will prompt banks to be cautious while disbursing loans to avoid further non performing assets (NPAs) on their books. Ravi Ramu, director of Bangalore-based developer Purvankara Projects Ltd, said, “Banks will not lend to smaller developers who run the risk of getting into project execution problems.”

An increase in provisioning requirements would also mean that banks will now lend to developers at higher interest rates. This, in turn, may force developers to push prices up, at least marginally which could mean higher prices for buyers. “Developers would find the cost of loans going up, which can adversely impact their liquidity position and might force them to pass on the prices to the end users,” said Priyankar Bhikshu, head of consulting & research - India, DTZ.

This could also mean higher prices — at least in the affordable housing segment as no developer would like to pay from their pockets.  Hari Prakash Pandey, vice-president (finance), Housing Development and Infrastructure Limited (HDIL), said, “Currently prices have already moved up. Even if HDIL has to increase price then it would not be more than 5% of the flat price.”

(with inputs from Pooja Sarkar and Newswire 18)