Our Bureau

Mumbai, July 26

TO check unrestricted flow of bank funds to real estate and capital markets, the Reserve Bank of India has increased the risk weights for banks' outstanding exposure to these sectors from 100 per cent to 125 per cent with immediate effect.

Banks will have to set apart more capital in their books as cover to maintain their existing level of lending to these sectors.

Exposure to commercial real estate includes loans to commercial premises, office buildings, multi-family residential houses, warehouses, hotels, and for land development and constructions.

Addressing a press conference to announce the first quarterly review of the monetary policy here on Tuesday , Dr Y.V. Reddy, RBI Governor, said banks' exposures to commercial real estates have gone up to Rs 12,000 crore in May this year from Rs 5,000 crore in May last year. Last year, the RBI had increased the risk weights for banks' housing loans from 50 per cent to 75 per cent.

Dr Reddy said at the current stage of development, increasing bank loans to housing sector is encouraging.

At the same time, it is necessary to take some precautionary measures.

"Banks' housing finance should grow but it should grow in a healthy and prudent manner," Dr Reddy said.

Banks' exposure to capital markets includes direct investment by banks in equity shares, convertible bonds and debentures and units of equity-oriented mutual funds.

This also includes advances against shares to individuals for investments in IPOs or ESOPs and secured or unsecured loans to stockbrokers and guarantees issued on behalf of brokers. At present, banks' capital market exposure is restricted to 5 per cent of their gross advances.

The RBI has recently decided to allow, on a case-to-case basis, banks to increase their exposure to 8 per cent.

In fact, some private banks have been seeking RBI permission for higher capital market exposure limit though PSU banks are generally satisfied with the 5 per cent cap.

(This article was published in the Business Line print edition dated July 27, 2005)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.