Indian real estate sector continue to enjoy mounting bank loans

The Reserve Bank of India (RBI) has brought to the fore a new reality although the bigwigs in the Indian banking sector have been relentlessly stating of their endeavors to reduce real estate exposure. What is the reality then? In accordance with RBI data, loans to the real estate sector grew 61 per cent on a year-on-year basis, with Rs 90,765 crore outstanding as on February 27, 2009. On the other hand, during the corresponding period in the previous year, the growth was 26.7 per cent.

Take for instance the year up to February 2009. During the same period growth for public sector banks was a 79.1 per cent. In addition, credit deployment by foreign banks to real estate companies registered a 41 per cent growth for the 12 months up to February 27, 2009, compared with a 36 per cent decline last year. There is no doubt that the 40 per cent growth in exposure to real estate firms is noteworthy when seen against the annual growth in total credit by foreign banks, which was 4 per cent as on March 27, 2009, even though the balance sheets of foreign banks are much smaller compared to their public sector counterparts.

It must be noted, that at the same time, growth in loans from the banking system fell from 12 per cent to 7.5 per cent. However the bank executives are steady and said that growth in real estate loan flows was on the basis of sanctions before October and growth had slowed down in the second half.

“During the last two years (2006-07 and 2007-08), real estate developers had launched a large number of projects which were initially funded by customers’ pre-sale contribution, with bank credit utilised over the last six months of construction,” said Amit Jain, managing director, strategic clients coverage group at Standard Chartered Bank.