Virtually turning down a finance ministry proposal, the central bank cited concerns about the likely adverse implications of an increase in banks exposure to the risky sector, especially when banks non-performing assets (NPAs) are on the rise in a slowing economy.
Infrastructure status entails multiple benefits such as tax concessions and easier access to overseas loans, besides relatively cheaper bank funds on a priority basis. Currently, scores of housing projects across the country are stuck for a variety of reasons including want of requisite clearances, cautious lenders and higher cost of finance.
In line with the governments policy, in the case of sectors accorded infrastructure status, the RBI classifies the loans as NPAs only if the borrower fails to commence commercial operations within two years from the original date set whereas other projects will get the NPA tag for a six-month lag.
In the aftermath of the 2008 global financial crisis, several developers in India too found it difficult to repay their dues. The RBI, on its part, has been keen to ensure that the banks risks owing to their exposure to the real estate sector are reduced so that there are no systemic problems.
The external commercial borrowing access for the sector was restricted to projects, rather than realty firms, with tough end-use norms as a measure of caution.
In 2009, the central bank had increased the provisioning norms for banks in respect of advances to the commercial real estate sector classified as standard assets to 1% from 0.4%. This means of every Rs 100 loaned to a commercial real estate project, the bank will have to set aside Re 1 as a safety net against potential bad debt. In case the secured asset is substandard, the provisioning is as high as 15% (from 10% earlier). The finance ministry wants these norms to be relaxed to give a boost to the construction sector.
The construction sector, which accounts for roughly 8% of the countrys gross domestic product, expanded at 8.8% in the first half of the current fiscal, compared with 4.9% a year earlier, although the pace of growth slowed to 6.7% in the three months through September 2012 from 10.9% in the previous quarter. The sector had grown at 5.3% in the last fiscal, the lowest in three years.
If the RBI relaxes the provisioning norms for housing sector and brings them back to the pre-2009 levels, banks will have more funds with them to give at low interest rates to the housing sector, which in turn can bring down the construction costs and the prices of houses, an official source said.
The RBI is not agreeable to our request, a finance ministry official said, adding that the ministry has again asked the regulator to consider the proposal as there is an urgent need to support labour-intensive sectors such as housing to script an economic revival.
Punjab National Bank CMD KR Kamath said, Infrastructure status to housing will help banks facilitate completion of projects that are stuck. If the labour-intensive housing sector is activated, around 200 allied sectors will also get a boost and kick-start the economic revival. However, he added that banks, already saddled with huge NPAs, will be cautious in lending and will follow strict risk management guidelines.
Incidentally, justifying the ministrys proposal, the growth in deployment of gross bank credit to the commercial real estate sector had fallen in 2011-12 to 7.8% from 21.4% in the previous year. However, despite a fall in demand and an increase in the number of unsold units, average housing prices have not fallen in major cities in the country.
The RBI currently gives benefits of infrastructure status to roads, ports, power, airports, water supply, irrigation, telecom, industrial parks, food processing, storage of processed agro-products and perishable goods, educational institutions and hospitals, laying/maintenance of oil pipelines and special economic zones.