The Hindu Business Line : RBI cautions banks on realty exposure

Mumbai, Dec. 18 The Reserve Bank of India said it is imperative for banks to manage the balance sheet risks associated with real estate exposure, particularly in the current scenario of slowdown in the economy with its expected ramifications on real estate prices.

Given the historically positive correlation between economic downturn and its adverse impact on real estate prices, the RBI said risks — credit, interest rate, liquidity, pre-payment, transfer of risk from subsidiaries, operational (frauds) — may get transmitted to a bank’s balance sheet in respect of its real estate exposure (REE).

Referring to the interlocking of credit booms and real estate bubbles in the economic upswing, followed by the damaging impact of prolonged real estate slump on the solvency of banks, the availability of credit and general economic growth, RBI said, anecdotal evidence suggests that real estate price rose two to four times during the last three to four years in different parts of the country.

Pilot survey

A pilot survey on ‘Real Estate Prices and Rent in Greater Mumbai’ conducted by the RBI showed that the rent and sale/resale prices of residential properties in Mumbai increased significantly over the last four years.

Sharp rise in real estate prices raises some concerns for financial stability.

Real estate prices, like other asset prices, have important effects on output and inflation.

Over the years, banks in India have enlarged their exposure to the real estate market. Such exposure at the end of March 2008 constituted 19.3 per cent of total bank credit as against 1.6 per cent during the same period in 2004.

In view of the risks posed by accelerated exposure to the real estate sector, the RBI initiated several regulatory measures, including advising banks to frame board approved policy, prescribing higher risk weights, disclosure and reporting of the REE.