Newstrack

Hotels, hospitals may be spared real estate tag

Move will leave banks with more funds for commercial realty

Mahua Venkatesh & Subhomoy Bhattacharjee - New Delhi

The furious rate of growth in the real estate sector is set for a fresh round of support from the government. To insulate genuine demand for investment in commercial real estate, the finance ministry is considering splitting up realty segments for defining bank credit.

Such a move will not only allow banks to lend more to these segments against available capital, but also leave them with more funds for commercial realty. Accordingly, money lent by banks for construction of hotels, hospitals and educational institutions will not be defined as credit for commercial real estate. The government is of the view that these segments do not fuel the real estate asset bubble. This will be a big relief for some of the mega-construction projects in the pipeline.

When contacted, bankers said, this would mean that such credit would escape the Reserve Bank of India's stiff guidelines for loans to the real estate sector. To curb speculative investments, the central bank set the risk weights for capital allocation at 150 basis points on banks' exposure to commercial real estate and home loans above Rs 20 lakh.

Top sources in the government said this was being contemplated after analysing the disaggregated figures of credit to the commercial segment of the real estate sector. They said, of the 102 per cent rate of growth recorded in credit flow to commercial real estate, a substantial part was taken up by lending to hotels, educational institutions and hospitals.

Concerned about the over-heating of the real estate sector, the RBI increased the risk weights for advances to commercial real estate initially from 100 per cent to 125 per cent (in July 2005) and then to 150 per cent in April 2006. This means banks have to set aside more capital while lending to this sector.

It also increased the provisioning requirements for standard advance under commercial real estate and housing loans of Rs 20 lakh and above from the earlier 0.4 per cent to one per cent in April 2006. This means lenders have to set aside Re 1 for every Rs 100 lent to the sector.

Since such investment is productive, excluding them from the guidelines for the real estate sector will keep up the growth momentum achieved by the construction sector. As a consequence, the rising trend in interest rates will not impact the potential of the sector.