Alarming rise in credit to real estate sector

If the Economic Survey figures are anything to go by, lending to sensitive sectors—with high chances of boom going bust—is zooming. The high-risk real estate sector has witnessed the maximum rise in loan disbursals among all sectors of economy—at 90 per cent—from the Indian banks till October last year, the Survey has revealed.

In view of the very rapid growth of credit to the real estate sector, the RBI has already tightened the prudential norm by enhancing the risk weight on banks’ exposure to the real estate sector. As on October 2005, the banks lent Rs 20,148 crore to builders and private developers as compared to Rs 8,240 crore lent in the same period of fiscal 2004.

The banks gave another Rs 153,267 crore as home loans till October 2005. The RBI said as of March 2005, 62.9 per cent of SCBs lending to sensitive sectors consisted of real estate at Rs 24,691 crore. The private banks lent another 15,125 crore to the real estate sector.

Analysts say that real estate sector witnesses high volatility due to entry of speculators in the industry. As of now, real estate prices have shot up to unrealistic levels as many speculators have entered the market again. On the other hand, gross bank credit has showed a rise of 39.2 per cent from October 2004 till October 2005. Credit to agriculture showed a rise of 39.1 per cent and SSI 17.3 per cent.

PRESSURE ON RATES: The survey has cautioned about the upward pressure on interest rates. Though happy with the 17 per cent increase in credit offtake and the resultant economic boom, the Survey asked the government to maintain a check on interest rates, saying the high demand coupled with uncertain prospect of inflation and surging global oil prices could exert pressure on them.Banks have already started hiking interest rates on home loans. Many PSU banks are waiting for the Budget before taking a view on rate hike.

The document said uncertainty regarding inflation due to volatile global oil prices and continued firming up of global interest rates beyond a point, poses the risk of dampening the domestic investment boom. There may be a need for further capitalisation of banks and for developing strict management techniques and methods of prudent evaluation of investment proposals, the survey said.

Source: http://www.indianexpress.com/