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RBI is raising rates by the backdoor

RBI has increased the provisioning for real estate loans to 1% from the earlier 0.4%. This will put a brake on bank funding of real estate

The just-released credit policy of the Reserve Bank of India (RBI) has raised the provisioning for real estate loans to 1% from the earlier 0.4%. Besides, the Statutory Liquidity Reserve/Ratio (SLR) of banks has been increased by 1% to 25%. This means that the RBI is discouraging banks from lending money to the real estate sector. A few developers were planning to increase property prices but they will have to hold back now as it will be difficult to get bank funding for their projects. Developers had started increasing the prices of the properties from Q2 FY10.

Of course, real estate agents have tried to play down the impact. “The impact on the real estate sector is not significant as we see it. Banks will now be a little more cautious while lending to real estate players. However, interest rates are at their lowest in recent times, and even a marginal hike due to this tightening in provisioning will not affect the overall sector seriously. Rather, it might help, as the central bank is trying to curb the formation of an asset bubble—in other words, trying to control the asset prices for end users,” according to Shobhit Agarwal, joint managing director—capital markets, Jones Lang LaSalle Meghraj.

Keki Mistry, vice chairman and managing director, HDFC Ltd, told Moneylife, “The tone of the policy has been tilted towards inflationary concerns, but the RBI has resisted monetary tightening, recognising its limited impact on reining in inflation as it is driven by rising food prices. The policy has laid the framework for a gradual reversal of monetary expansion in a manner in which it will not compromise on growth.”

He also added, “The RBI’s dilemma ranges from anchoring inflationary expectations without compromising on growth, containing asset bubbles and managing currency volatility and the government’s borrowing programme. Though GDP growth in the first quarter of FY 2010 at 6.1% was an improvement over the previous two quarters, the recovery process is taking time.”

Approximately 600 new projects have been announced by many developers across six cities (Mumbai, NCR Delhi, Bengaluru, Pune, Chennai and Hyderabad) during the festive season. The developers who have not yet got the financing for their projects will face difficulty in getting funds from the banks now. This will prevent the developers from hiking the prices and they have to look for other modes of funds. Reflecting this concern, the BSE Realty Index fell by 6.24% today.

“Banks will lend less but the developers have other forms of borrowing open to them. There are 16 IPOs coming and the developers are even raising money through QIPs. I don’t think the prices of property will go down due to the banks cutting down on the real-estate lending,” said Pranay Vakil, chairman, Knight Frank, a real estate advisory firm.
“RBI allowed banks to lend more to the real estate sector which boosted the lending to real estate sector from Rs62,178 crore in May 2008 to Rs94,499 crore in May 2009 so that the developers pass the benefit on to the consumers. But that did not happen. Rather the developers started increasing rates. The RBI had to step in so that the developers reduce rates and the consumers benefit,” said Pankaj Kapoor, founder and chief executive officer, Liases Foras, a property research firm. The real estate sector has been recovering since April 2009, after which there has been a flood of qualified institutional placements (QIPs), Initial Public Offerings (IPOs) or follow-on issues so that they can complete old projects which were stuck since November 2008.
 —Pallabika Ganguly [email protected]

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