Relaxation of Provisioning Norms for Real Estate Loans on the Horizon?
The Reserve Bank of India (RBI) is contemplating relaxing the provisioning norms for loans extended to the real estate sector, among others. This development follows a meeting between PSU banks and Finance Minister P Chidambaram on Tuesday, where the banks petitioned for a relaxation of these norms to facilitate more aggressive utilization of their capital.
Current Provisioning Norms
- Currently, banks are required to maintain a capital base of Rs 9 to offer a loan of Rs 100.
- For real estate sector loans, the RBI has increased the capital base requirement by approximately 50% for certain loan categories, necessitating a base of Rs 13.5 for a loan of Rs 100.
- Home loans exceeding Rs 20 lakh also require banks to maintain a capital base of almost 13.5% of the loan amount.
The Case for Relaxation
- According to a PSU bank's CMD, the current norms have inflated the cost of funds for lending to the real estate sector, despite the sector's bad loan percentage being less than 1%, which is lower than the overall banking sector average.
- The banker emphasized that if the government aims to boost credit flow to the realty sector at competitive rates, relaxing the provisioning norms is imperative.
Impact on the Real Estate Sector
- Finance Minister P Chidambaram highlighted the real estate sector's significant influence, affecting approximately 50% of the GDP due to its interdependence with sectors like steel, cement, and various small-scale industries.
- Chidambaram urged banks to enhance credit flow to the real estate sector.
Broadening the Appeal for Norm Relaxation
- Banks also sought a revision of provisioning norms for other Non-Performing Assets (NPAs).
- The existing norms, tightened over the last couple of years, have led to project delays due to insufficient funding, with some corporates requesting loan rescheduling.
- According to current norms, such accounts are classified as bad loans, necessitating capital provisioning, which affects bank profitability and reduces their capital base and lending capacity.
- Banks proposed that if they are to reschedule loans or provide credit to vulnerable sectors, the provisioning norms should be relaxed and made more practical.
Assurance from the Finance Minister
- It is understood that the Finance Minister has assured the banks that the RBI will examine the matter soon, aligning with the global trend of central banks relaxing provisioning norms post the global financial crisis to facilitate increased corporate exposures.
Emphasis on Safety
- Chidambaram, however, stressed the importance of safety, advising banks to augment their capital bases to ensure their total loan portfolio does not exceed 8.33 times their capital base, or in banking terms, maintain a Capital Adequacy Ratio (CAR) of at least 12%.