Slowdown Of Real Estate Affects Loan Industry

The slowdown in the real estate sector has started impacting the securitization of loans to the industry. The demand for such securities has dried up as debt mutual funds turn wary and cut exposure to these securities, considered the most illiquid of tradable papers.

The market for loan securitization was Rs 31,000 crore, of which real estate loan securitization accounted for 20% of the total market as on March 2008. Both ICICI bank and the State Bank of India refused to comment.

It is allowed to a bank or a NBFC to sell the loan as a securitized paper. Mutual funds are the major buyers of these papers, return on which is linked to the rating of the loan. Following the securitization, loan disappears from the balance sheet of the banks or NBFCs, who in turn communicate to the borrowers that their loan has been sold to an investor.

From borrower’s point of view, it could mean lesser disclosure. Borrowers then keep repaying to the Special Purpose Vehicle (SPV) where such paper is parked instead of the bank or NBFC. Banks make good the spreads between lending at a certain tenor to selling the loan for a higher yield. Rajiv Shastri, Lotus MF said, “We have been very wary about these loans from the very beginning, primarily because they didn’t offer high asset cover-age. Most papers floating in the market offered one-and-a-half times asset coverage, which is nothing if prices start falling. Last November-December, we just took two papers, which offered us a coverage of 3-4 times”.

Debt funds from the houses of Reliance, DWS and HSBC have been fairly aggressive in buying real estate loans. Reliance MF CEO Vikrant Gugnani said, “We are more cautious in today’s conditions like anyone else. We have always been conservative in our investment policy and we remain so”.

BNP Paribas Chief Investment Officer (CIO) Mr. Ram Kumar said, “If it is a loan taken by a big realty company, the rating will be higher and there are more buyers for such papers. But we treat these investments like any other paper, although they are illiquid. We do not invest in them anymore. We did, two years go”. Many other fund managers too have changed their stance now.

For over two years now, the RBI has raised the risk weight for commercial real estate loans to 150% in addition to issuing guidelines on multiple occasions to banks to limit their exposures to the sector. Nevertheless, real estate loans form only a small part of most banks’ balance sheets, thus allowing them to continue financing real estate assets.

One Comment

  1. Posted July 18, 2008 at 6:40 am | Permalink

    Sensing a correction in the real estate sector, commercial banks have become selective in lending to new residential and commercial real estate projects. Besides increasing the lending rates, some banks have asked the promoters to increase their share in project funding in an attempt to mitigate the associated risks. Banks have already turned selective in taking up new funding proposals. The Reserve Bank of India has already declared the real estate space as a sensitive sector under its prudential norms. The sector thereby attracts higher risk weightage (banks have to set aside higher amount of capital for real estate exposure) and the lending is closely monitored. Keeping with the rising cost of funds and the need for additional capital for risky assets, the banks have increased the lending rates for real estate projects. The real estate companies are now paying prime lending rates (PLR) for new projects. The growth in loans to commercial real estate remained high, notwithstanding some moderation, RBI said in its macro-economy report for 2007-08.For more view-

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