Tighter Banking Norms Ahead for Commercial Realty Loans?
The Reserve Bank of India (RBI) is contemplating measures to enhance banks' resilience against the burgeoning commercial realty sector. As per senior banking officials, the RBI may opt for one of two possible approaches in its forthcoming policy announcement on April 20.
Enhanced Provisioning or Risk Weight: The Two Options
- Increased Normal Provisioning: This would necessitate banks to set aside a larger portion of their funds for loans to commercial realty projects, potentially leading to increased interest rates for borrowers in this segment.
- Heightened Risk Weight on Realty Loans: By assigning a higher risk weight to these loans, banks would be required to hold more capital against them, effectively making these loans more costly for borrowers.
Banking Sector Insights
- SA Bhat, Chairman and Managing Director of Indian Overseas Bank, hinted at the possibility of tightened prudential norms, given the RBI's decision to maintain the cash reserve ratio (CRR) and signaling rates (reverse-repo rate and repo rate) unchanged.
- As of November 2009, banks' exposure to commercial realty stood at approximately Rs. 88,581 crores.
Understanding Risk Weight and Capital Sufficiency
- Currently, the risk weight for all banks is set at 9%. This translates to a capital reserve requirement of Rs. 1.80 for every Rs. 100 loan for triple A-rated clients, indicating a lower capital requirement for higher-rated borrowers.
- An increase in risk weight would inversely affect the capital requirements, making loans more expensive for the commercial realty sector.