Real estate expected to bear the brunt of increasing home loan rates

By News Desk | April 19, 2010

Home loan rates may increase making borrowing costly for builders. It is expected that RBI may ask banks to provide more capital for loans to real estate projects. If this occurs then banks would require more capital which would force them to increase rates of home loans.

It is believed by top banking officials that RBI may either increase the standard provisioning or risk weight on loans to the real estate firms in its monetary policy review expected on April 20.

Experts say that an increase in loans by 2% would impact the real estate sector. But, RBI’s action would be a protective step to lower the risk exposure of banks to home loans in the light of towering prices.

SA Bhat, chairman and managing director of Indian Overseas Bank said, “If RBI does not raise cash reserve ratio and keep signaling rates like repo rate and reverse-repo rate untouched, my feeling is that it may tighten the prudential norms. A hike in risk weight, particularly on real estate loans, is not ruled out”.

Capital adequacy ratio is computed using the risk weights. The risk weight is directly related to the credit worthiness of the borrower. But regardless of the rating, risk weight for real estate firms is 100% which implies banks have to keep aside Rs 9 per Rs 100 of loan to builders.

Hemindra Hazari, head of research Karvy Stock Broking said, “Government and banks bailed out real estate companies by providing financing to them. The growth in this sector was higher than the overall credit growth, as a result, prices did not come off significantly. Revival in the sector has resulted in real estate prices rising and now RBI may need to make an effort to cool down prices”.

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