Bank lending to the commercial real estate space ? sometimes considered a risky proposition ? has been on the rise over the last six months, data from the Reserve Bank of India show.
For the April-October period, bank lending to the commercial real estate sector grew 12.79% compared to growth of just 3.85% in the same period last year. October showed the steepest pick-up with a 21.1% growth in lending to commercial real estate, which hit R1,43,700 crore. This compared to just 9% growth in lending to the segment in October 2013.
Bankers, however, say much of this pick-up is due to an increase in lending to companies that are developing residential complexes. Loans to developers for the purpose of residential complexes are classified as commercial realty, while those to individuals for buying of property falls under the home loan category.
?A major portion of lending in commercial real estate goes to fund building of residential complexes. During this year, other areas of opportunity are blocked. And people in real estate wanted to invest in residential complexes. Banks also saw this as an opportunity to grow their portfolio,? said a senior official at a public sector bank.
While the real estate space has been seeing a slowdown along with the rest of the economy, certain markets in southern India have seen steady growth in demand, say bankers. ?Cities like Bangalore and Chennai are growing and there is some demand from these places,? said Dipak Gupta, joint MD at Kotak Mahindra Bank.
Oriental Bank of Commerce added that credit to developers like DLF and Unitech via lease rental discounting (LRD) loans has also picked up. SL Bansal, CMD, OBC, said LRD loans are a good option for banks to grow their commercial real estate portfolio as the risk associated with these loans is generally low.
LRD is a term loan under which a developer pledges his future rentals to a bank against a loan. The terms of repayment include a clause that ensures that the rent is directly deposited with the bank and not with the developer. The bank, before sanctioning the loan, discounts future rent projections depending on the lock-in periods, the profile of the tenant and other factors.
However, bankers say the broader real estate space continues to be sluggish. ?You still don?t find enquiries for commercial real estate. There might be some demand from big developers but there?s not much from smaller developers. The growth seems high as the comparing base was lower last year,? Bansal added.
