Change in provisioning norms for realty gets mixed response

Written by Mona Mehta | Kakoli Chatterjee | Mumbai | Updated: Oct 29 2009, 04:08am hrs
The Reserve Bank of Indias (RBI) move to hike the statutory liquidity ratio (SLR) and increase the provisioning norms for advances to the commercial real estate sector evoked a mixed response from builders and international property consultants. While a section of industry professionals FE talked to said the increase in provisioning norms could hamper funding to the sector and force banks to raise interest rates, others felt the step was a corrective measure to prevent oversupply. Provisioning is the risk ratio capital set aside by lenders in anticipation of future defaults by real estate companies.

According to Niranjan Hiranandani, managing director, Hiranandani Constructions, RBI has taken corrective measures for the commercial real estate sector to make sure that there is no oversupply of commercial properties. This is to meet the not-so-growing demand for commercial real estate sector, unlike demand for residential sector, which has grown since the past two quarters. We expect the demand for overall commercial real estate sector to pick up from January 2010 onwards.

Hiranandani added that although the demand for commercial real estate has not grown, the lending has picked up. Hence, RBI has changed the risk weightage for lending in commercial real estate. Thus, RBI has taken a conservative view of volume exposure to commercial real estate.

Praveen Sood, group chief financial officer, Hindustan Construction Company feels that hiking SLR and increasing provisioning norms for advances to commercial real estate sector will create liquidity problems for lenders to commercial developers. This is because the money availability will now get squeezed.

Considering the RBI move, it seems obvious that banks will now be a little more cautious while lending to real estate players. Shobhit Agarwal, joint managing director, capital markets, Jones Lang LaSalle Meghraj (JLLM) comments, 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, it is trying to control the asset prices for end users. If well-implemented, this policy will benefit property buyers in the long run.

RBI's announcement sent shares of realty companies reeling on the stock exchanges on Tuesday. Shares of HCC fell 4.84% to close at Rs 123.85, and shares of DLF Ltd dipped 6.58% to close at Rs 401.80 on the Bombay Stock Exchange. Indiabulls Real Estate witnessed a drop of 2.82% to close at Rs 256.35. The stocks of Orbit Corporation dipped by 5% to close at Rs 235.70.

Pradeep Jain, chairman, Parsvnath said, Immediate impact of this measure is going to be that rentals will go up. Since, we are primarily into developing residential property, we will not be impacted much by this measure. However, Rajiv Talwar, group executive director, DLF, said, The increase in provisioning will send a negative signal which at this juncture was not required. Every increase in cost is passed on to the end user. Lack of funds will not mean that projects will be cheaper. It will mean that projects will become more expensive. In fact, by decreasing supply, there is a chance that there will be an asset bubble as the price of the existing projects are going to go up.

According to Priyankar Bhikshu, head - consulting and research, India at DTZ International Property Advisers, developers would now find the cost of loans to go up, which can adversely impact their liquidity position and might force them to pass on the prices to the end users. This, combined with the sluggish sales of last few months, indicate that the sectors recovery path could see some hurdles in the near future, he said.