The Reserve Bank of India has asked banks to set aside more pelf for loans to realty projects which may eventually make borrowing more costly for builders. An increase in capital requirement will force banks to hike the rate of interest on such loans.

SA Bhat, chairman and managing director of Indian Overseas Bank gave his perception saying “If RBI does not raise cash reserve ratio and keep signalling rates undisturbed, my feeling is that it may strictly check the prudential norms. A hike in risk weight, particularly on real estate loans, is not ruled out.” According to the latest available data, banks exposure to commercial real estate is approximately Rs 88,581 cr.

The money that is kept aside to calculate adequacy ratio is called the Risk Weight which is 9% for all banks. Banks have to set aside less capital for borrowers with higher credit rating. For a triple A clients, the risk weight is 20%, which means banks have set aside Rs 1.80 of its own capital for every Rs 100 loan to such borrowers.

The risk weight for realty sector companies is 100%,  that is Rs 9 have to be kept aside for every Rs 100 loan to builders. This may increase to 125 percent or even 150 percent in the policy that are yet to come. To help builders and banks cope with the crises, RBI had lowered it to 100% from 150% during the decline.

As said by Hemindra Hazari, head of research Karvy Stock Broking said “Government and banks released real estate companies by financing them. Prices did not come off significantly because the growth in the realty sector was higher than the overall credit growth.Revival in the sector has landed in hike in the realty prices and now RBI may need to make an effort to lower down prices.”

Unlike personal loans, which increase only 0.7% as banks slowed down when customers began to default, they continued lending to builders. It was not justified since it meant financing a high risk sector.This did not dropped the realty prices to the extent that it actually should.Some bankers think that RBI may raise standard provisioning on commercial real estate loan, which is now at 1%. It is the money that banks set aside from their earnings on standard loans to protect their books if the borrower defaults.

Speaking on the actions, Bharat Dalal, fund manager at Dawnay Day AV Financial Services, said, “Although most of the news has already been factored in, a sentimental boost on the back of the monetary policy is expected next week. A rally up to 3200-3250 on the Nifty is likely, provided 2975 hold. In an extremely optimistic scenario, 3400-3450 could be expected.”

The RBI slashed its two key short-term interest rates by hundred basis points each to stimulate an economy that has been slowing faster than expected. It cut the repo rate, at which it lends cash to banks, to 5.5% from 6.5%.

The reverse repo rate was cut to 4%. RBI announced a cut in cash reserve ratio, the proportion of deposits banks must keep with the central bank, by 50 basis points to 5% with effect from January 17th 2009.

It allowed the preparation of a special financing entity to provide liquidity support against investment grade paper to non-banking finance companies. The RBI has separately infused three lakh crore rupees liquidity into the system by way of cuts in key policy ratios – CRR and SLR. In addition, RBI provided a eleven thousand crore rupees fund to National Housing Bank and the SIDBI in a bid to promote lending to housing and SME segments.

The government realized the need for a second package as industrial output slipped into negative zone for the first time in fifteen years in October. The Index of Industrial Production fell 0.4% during that month. Exports also shrunk for two months in a row, with November figures showing a 9.9% decline.

The price cut, if implemented by the country’s builders will also push sales higher, especially of the affordable category, property consultants said.

”Many developers will come down on their asking rates after being saddled with unsold stock beyond their ability to hold on,” added Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj (JLLM).

Property prices in the key cities have more than doubled in the past few years helped by a boom in the stock market and a spurt in salaries of home buyers. The subsequent measures of the Reserve Bank of India to cool the overheated economy and a sub-prime crisis coupled with a credit crunch, has tempered growth prospects in the country hurting sales of property developers.

The benchmark sensitive index, the Sensex, has dropped more than 60% from the beginning of the year, eroding much of the investors’ wealth and RBI has increased repo rates by 150 basis points till September this year to curb inflation.

“If you take same time next year, there will be better volumes at lower prices than what they are today. Buyers will be tired of waiting and all the developers realise that price cuts are necessary across the board,” said Pranay Vakil, chairman of property consultancy Knight Frank India.

To boost sales, property developers have been forced to cut prices of real estate but buyers are still adopting a “wait and watch” stance as many feel that even the lower rates continue to be unaffordable.

Property prices in Gurgaon, Noida in the National Capital Region (NCR) have fallen by 25-30% while Mumbai’s distant suburbs have seen 15-20% drop in prices. Now property consultants foresee further price correction of 25-30% in 2009.

“By the middle of 2009, developers will loose holding power and cut prices sharply. Cuts will follow big time after elections,” said Ambar Maheshwari, director of DTZ, an investment advisory.

Experts say that developers are likely to focus on sub Rs 20 lakh flats due to huge demand for such flats and the government’s stimulus package for Rs 20 lakh home loans.

“Earlier, developers thought that there is latent demand for premium homes, but in the current slowdown, that perception has changed. There is always demand for Rs 5 lakh-Rs 15 lakh homes and developers will look towards that,” Maheshwari said.

Kalpana Morparia, JP Morgan India’s chief executive officer, recently revealed that the company has invested nearly 500 mn dollar from the fund in 4 sectors of the Indian economy – real estate, infrastructure, manufacturing and financial – and that it is exploring other investment opportunities in the South Asian nation.

“We have a fund of 1 bn dollars to invest in Indian companies,” Morparia said. “We have committed nearly half the money in real estate, infrastructure, manufacturing and financial sectors.”

Morparia did not identify the companies or projects that JP Morgan India has invested in, but she described funding commitments as “opportunistic,” and said that the company was in no hurry to complete the 1 billion dollar plan because it is investing its own money.

“The moderation in exports, small business output, and real estate related activity could crimp urban consumer spending as employment and household income growth slackens,” JPMorgan said in the Nov. 17 research note.

In September 2008, JP Morgan India said it would double its private-equity investments in the country up to 1 bn dollar, in addition to investing approximately 500 million dollar in its corporate finance and advisory units. Total private-equity investments across India increased 3.2% in the first half of 2008, to about 6.8 bn dollar.

JP Morgan Chase has invested in a variety of private Indian entities since last year, including L&T Infrastructure Development Projects Ltd., Apollo Hospitals & Enterprises Ltd. and Cafe Coffee Day, a Chikkamagaluru, India-based division of Amalgamated Bean Coffee Trading Co. Ltd. Café Coffee Day has more than six hundred cafes in 110 cities across India, making it the country’s largest coffee café.

JPMorgan India has also acquired separate, 50 mn dollar equity stakes in a pair of fast-growing, New Delhi-based real estate developers: Emaar MGF Land Ltd., which focuses mainly on residential, commercial, retail and hospitality projects, and BPTP Ltd., which is currently developing numerous projects, including residential and commercial complexes, retail spaces, IT parks and special economic zones and hospitality ventures.

JP Morgan India’s continued funding for Indian real-estate ventures stands out in a country where developers are struggling to complete ambitious projects. As the global economic crisis has worsened in recent months, local banks have clamped down on lending to the construction industry and a stock market slump has closed off equity raising through initial public offerings

JPMorgan Chase, which launched its India operations in 2001, has approached India’s central bank for licenses to set up four more branches in the country. The branches would be in Delhi, Chennai, Bangalore and one more destination in the south, according to the company.

In addition to its Mumbai banking branch, JP Morgan India currently has back-office operations in Mumbai and Bangalore. It employs more than 11,500 people in the country and plans to increase its headcount there, in spite of the slowing Indian economy.

“We welcome various measures announced today by the government in its economic stimulus package. These measures and those announced by the Reserve Bank of India (RBI) yesterday will certainly improve credit flow to the realty sector and also stimulate demand for housing. We as developers will respond by offering affordable housing,” said Sanjay Chandra, managing director of Unitech Ltd, one of the country’s leading real estate developers.

The government today said that public sector banks would shortly launch a package for home buyers. The government expects lower interest rates offered by the public sector banks to trigger similar moves by the private banks and housing financing companies, thereby spurring the demand for homes.

“This is a good move by the government and a cut in the interest rate will definitely spur some activity in the real estate business. In another four weeks, we should see the difference,” said Raminder Grover, CEO, Homebay Residential Pvt Ltd.

According to the government, the contribution of banks to the housing loan market is 20-25%. The package is expected to spur the demand, mainly in smaller towns. As much as 75% of home loans are in the range of Rs 7-7.5 lakh, according to government data.

“The construction industry is very important as there is a large housing shortage in the country. The sector is a large employer and is also connected to cement and steel industries. Banks have a major role to play to accelerate the growth of this segment,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said announcing the package.

Earlier, RBI unveiled plans of the Rs 4,000-crore refinancing facility for the National Housing Bank to ease the liquidity crunch faced by the housing finance companies. The central bank also included loans of Rs 20 lakh and below, given by banks to housing finance companies, to be lent to individuals, under the priority lending category.

The measures are indicative of the strong resolve of the government to serve the need for housing in the country, especially for middle- and low-income groups. Ahluwalia also hinted at an increase in the plan expenditure towards construction of houses for the poor through the Indira Awas Yojana.

According to Rajeev Talwar, group executive director, DLF, the steps announced by the RBI and the government indicates that the sector can be an engine for economic growth as it creates employment and has a multiple effect on industries like steel, cement, ceramic, transportation.

“The government has ultimately realised the problem faced by the second-largest employment generating sector of the country. Once the interest rates touch, say, 8 per cent, there will be a total turnaround in the sector,” said Navin M Raheja, managing director, Raheja Developers Pvt Ltd.

As a further measure of support for this sector, public sector banks will shortly announce a package for borrowers of home loans in two categories — up to Rs 5 lakh and Rs 5 lakh-Rs 20 lakh. This sector will be kept under a close watch and additional measures would be taken as necessary to promote an accelerated growth trajectory.

The country’s growth was 7.9 percent during the first quarter of the fiscal (April-June) and 9.2% during the second quarter of 2007-08 (July-September), as per data on gross domestic product (GDP) released by the Central Statistical Organisation (CSO).

Prime Minister Manmohan Singh, Finance Minister P. Chidambaram and Reserve Bank of India (RBI) Governor D. Subbarao have projected the Indian economy to expand by 7-8% during the current fiscal year ending March 31, 2009.

The main reason for the fall in the overall economic expansion during the period under review (July-September, 2008) was a low, 5-percent growth in the manufacturing sector, as opposed to 9.2 percent in the like period of last fiscal.

Similarly, agriculture also logged a significantly lower growth of 2.7%, as opposed to 4.7%, while hospitality, transport and communications expanded the best 10.8 percent against 11 percent during the second quarter of fiscal 2007-08.

What has, however, come as a surprise was the 9.7% growth ion construction, as opposed to 11.8% in the corresponding period of the previous year.

Financial services, realty and business services also registered a notable growth of 9.2%, against 12.4%, given the circumstances where real estate companies have been complaining about a major slowdown.

“Economic slowdown in India has been on since June. The real impact of global economic slowdown on the Indian economy will be actually felt in third and fourth quarters,” said Sri Ram Khanna, professor and head of department in Delhi School of Economics.

Dalip Kumar, head of projects at the National Council for Applied Economics Research (NCAER), an economic think-tank, said economic depression in US had begun showing its impact on the overall industrial growth in India.

“Our industrial growth has been hit and would continue to deteriorate further next year. This has largely contributed to the downfall of India’s economic growth,” Kumar told IANS.

The Associated Chambers of Commerce and Industry (Assocham) said that the 7.6% growth was satisfactory given the circumstances and expressed confidence that the same would be maintained in the remaining months of the current fiscal.

“Slowly and gradually, interest rates, inflation and input costs are falling down whose collective reflection will fall on the overall growth of GDP,” the chamber’s president Sajjan Jindal said in a statement.

Another industry lobby, PHD Chamber of Commerce and Industry, presented a somewhat different picture. “The slowdown in is shows that our economic indicators have started weakening with some segments being affected more than others,” the chamber said.

“Investment in infrastructure should be increased and an early completion of ongoing projects be effected on a war footing. Attention should be paid on building rural infrastructure to rejuvenate demand in the countryside.”

Such an exercise enables banks to keep their non-performing assets (NPA) ratios under check and their books clean of the stigma of dud loans. But in a little-known directive issued earlier this year, the central bank has ordered that the moment a loan to a builder is restructured, banks must classify the account as an NPA.

However, for restructured loans in all other sectors, the account can continue to be treated as a so-called ‘standard asset’, thus sparing banks from having to make large provisions in their profit and loss accounts. The inability to restructure loans easily is forcing banks to put pressure on builders to cut prices, sell properties and service loans. Builders are usually left with little choice as an NPA tag will make it difficult for them to approach other banks for funds.

“We are putting pressure on the real estate sector to reduce property prices. In such times, even if they are able to keep their head above water, it would be fine. They have all had a good innings so far. Now, they have to learn to live with thin margins,” said TS Narayanasami, chairman & managing director of state-run Bank of India, and the chief of industry body — Indian Banks’ Association.

“Just banks reducing interest rates will not help in reviving sentiments; builders will have to bring down prices for buyers,” Mr Narayanasami added.

Bankers say demand for home loans has fallen because buyers are waiting for property prices to fall. “Banks have taken the initiative by cutting home loan rates. Prices of cement and steel too have fallen, but builders have not reduced property prices,” said MV Nair, CMD of Union Bank of India.

Although the RBI relaxed some bank lending norms for the building sector last weekend, it has remained quiet on the issue of restructured loans of builders.

Analysts have expressed concerns over the financial health of the real estate sector. City-based retail broking firm, India Infoline, fears the liquidity situation of developers could worsen further if banks refuse to refinance maturing debts of real estate companies and maintain the credit freeze on their accounts.

“We reckon that debt maturing over the next 12 months for developers like Unitech, Sobha and Puravankara is higher than our estimate of these companies’ revenues over the corresponding period. The situation with Omaxe, Parsvnath and Ansals also remains precarious, owing to large land advances and high receivables”, it said in a research note.

The building sector has seen a raft of credit downgrades amid refinancing concerns and bankers say the sector has little choice but to cut prices. “If a builder does not pay, banks would either initiate a recovery proceeding or restructure the loan. A recovery proceeding often results in lower realization. This, hopefully, should indirectly put pressure on builders to bring down price and go for negotiated sales,” said SA Bhat, CMD of Indian Overseas Bank.

Expectedly, several public sector lenders were first to follow the advise. SBI have lowered their prime lending rates to 13%. Bank of Baroda, Allahabad Bank, Syndicate Bank, Central Bank of India, Oriental Bank of Commerce and Corporation Bank have reduced lending rates by 75 bps to 13.25% with effect from November 10. Dena Bank cut its PLR to 13.5% from 14.25% and, among foreign banks, Citibank lowered its benchmark lending rates by 50 bps to 15% with immediate effect.

Welcoming the liquidity infusion steps taken by the central bank, Mr Parekh said, “RBI has taken all possible steps to infuse liquidity and in the past 10 days. This will help the growth of the economy as well.”

He added that cash conditions were comfortable at the moment, and that he didn’t expect any further moves in the upcoming half-yearly monetary policy. “We might have to wait for the next credit policy for further moves,” said Mr Parekh, speaking on the sidelines of a conference on Tuesday.

He indicated that the central bank had taken a number of liquidity-infusing steps in the past two weeks, including cutting the repo rate by a percentage point and slashing cash reserve requirements for banks by 250 basis points. Though he refused to comment on interest rates with respect to HDFC, Mr Parekh added, “Lending rates can not come down unless deposit rates come down. At present, deposit rates across banks are pretty high.” He also said that real estate sales had come down.

“Real estate sales are dull at the moment. Prices need to come down for sales to rise again,” he added. Mr Parekh added that he saw the economy growing at 7% this year. “Though it is considerably below projections of 9%, it is still a strong rate of growth for any country,” he added.

Of these, about 28 venture funds (non-real estate funds) which have sought approval have committed close to $10 billion to India, according to lawyers involved with the registration process. Most of these foreign private equity firms have given an undertaking that they would not invest in the real estate sector or in related activities.

According to sources close to the development, policymakers and financial sector regulators are working towards harmonizing the regulations related to foreign venture capital investment, foreign direct investment and domestic venture capital investment.

“RBI is looking into a broad-based policy issue with regard to the foreign venture capital investments in the country,” said Akil Hirani of law firm Majmudar and Co, who is also advising a couple of foreign venture capital funds planning to register themselves with SEBI.

Although policy makers have been wary of venture funds investing in the real-estate sector, regulators have moved on to scrutinize many other applications in order to track the investors behind these funds. Because they believe that these investors are more focused on the returns they earn.

Regulators are concerned about issues such as whether these funds are beneficial for the real economy or even for the companies they seek to invest. RBI’s concerns also relate to impact of large capital inflows into the country especially into the real estate sector, which could fuel an asset price bubble. However, according to market participants, considering that a regime is already established and operational, any policy hiccups ought to be dealt with rather than keeping the proposals of PE funds on hold.

Policymakers are also looking at creating a level-playing field between foreign and domestic venture capital funds by ensuring that same tax rule is applicable to both. Foreign private equity funds now have an edge over their domestic counterparts under the existing tax system of the country as foreign funds registered in Mauritius and Cyprus enjoy the benefits of the double tax avoidance treaty.

Some of the FVCI applications pending RBI approval under the Foreign Exchange Management Act (Fema) include Apax Mauritius, Baring PE Asia, DE Shaw Composite Investments, Fidelity India Ventures, Goldman Sachs, JP Morgan, Sabre Abraaj Infrastructure and TPG Ventures.

According to the data compiled by SEBI, total investments by domestic and foreign venture capital investors amounted to Rs 31,682 crore as on March 31, 2008, of which Rs 16,705 crore comprises FVCI.

The real estate sector saw the highest amount of fund inflow considering it as one of the high-growth areas.

In 2004, SEBI had removed the real estate sector from the negative list, an incentive given by the market regulator to encourage PE funds to register as FVCI.

From a mere $9.6 million in FY05, when the Reserve Bank of India (RBI) eased the norms for investing abroad by individuals, overseas remittances topped $440.5 million in FY08, according to recent data released by RBI. And there are signs that the momentum on outbound flows could well be carried forward. In April alone, individuals remitted $50 million abroad.

Wealthy Indians have been buying property in Dubai, a favorite location. Malaysia is another hot spot fascinating Indian investors. Those flush with funds are diversifying their portfolio to include either shares of global blue-chip firms or units of MF schemes, which have an exposure to several emerging markets. A host of firms now offer structured products to high net worth investors here.
Besides, more Indians are gifting to their relatives abroad and loosening their purse strings to see the world or to educate their kids overseas. Much of this has to do with increasing liberalization and economic well-being. For years, RBI and the government had followed a tight policy on overseas remittances, given the weakness in the external sector. But over the past five years, the pile up of forex reserves has prompted an easing of norms.

Used to close monitoring of outflows, RBI has since 2004 progressively encouraged outflows to neutralize the impact of the torrent of capital inflows. The annual limit for remittances by individuals was raised from $25,000 three years ago to $2,00,000 with leeway for investing in stocks, property and other assets.

The RBI data shows that of remittances, the amount spent in acquiring property abroad, rose from $0.5 million in FY05 to $39.5 million in FY08. Investment in overseas debt and equity went up seven-fold from $20.7 million in FY07 to $144.7 in FY08. Remittances in the form of gifts to relatives increased almost 10-fold to $70.3 million in FY08 from $7.4 million in FY07.

However, the outbound remittance figure pales in comparison with inward remittances, which is now over $30 billion, reckoned to be the highest in the world. But going by the current trend, outbound investments by individuals is gathering steam. The higher outward remittances figure may also be because of the fact that investing abroad is now a legitimate activity. It also helps that a new generation of economically well-off Indians are not hesitant to display their wealth unlike their parents.

Top SBI executives, when contacted, refused to comment. SBI managing director S K Bhattacharya said, “We can’t divulge details before the first quarter results announcement”.

SBI’s credit quality had deteriorated during 2007-08, as it booked fresh bad loans worth Rs 2,700 crore, mainly on account of retail loans, and to some extent, mid-sized corporate loans. As on March 31, 2008, the bank had gross non-performing assets (NPAs) of Rs 12,837 crore compared with Rs 9,998 crore, a year back.

On the other hand, the bank is slated to make a provision of around Rs 1,000 crore against mark-to-market (MTM) losses of its investment. Out of this sum, around seven hundred crore rupees is expected to be provided for against depreciation of bonds the bank received from the government on account of its rights issue.

Banks are booking MTM losses against depreciation of bonds and equity investments during April-June 2008 period. Nevertheless, SBI is expected to clock double-digit growth in the first quarter to June 30, 2008 over the corresponding period a year back. This is despite the fact that demand for loans from sectors like commercial real estate and auto has slowed down.

Coming back to SBI’s bad loan management, government’s debt waiver-cum relief scheme would help SBI reduce its bad loans by another Rs 2,000 crore. SBI has waived overdues of around 25 lakh farmers, aggregating about Rs 7,000 crore. “It’s estimated that around 30% of the total waived sum had become NPAs,” another SBI insider indicated. Gross NPA stood at 3.04% as on March 31, 2008 while the net NPA stood at 1.78%.

Unitech, a Nifty component, has posted a gain of 4.6%. Penland, HDIL, Sobha Developers, Ansal Infrastructure, Omaxe, Parsvnath Developers and Mahindra Lifespace have gained 2.5% – 4.5%. India Bulls Real Estate has gained 1.5% at Rs 548.90. Anant Raj Industries is up with a modest gain of 0.65% at Rs 298.

Hindalco has jumped by 5.8% to Rs 197. HDFC has come off its high of Rs 2881, but at Rs 2846, still remains high up in the positive territory with an impressive gain of 4.65%. Jaiprakash Associates is up with a gain of 4.25%.

Satyam Computer Services, which zoomed to Rs 486.90 this afternoon, is up with a handsome gain of 7.75% despite having eased a bit to Rs 477.15. Infosys Technologies has notched up 4.4%. Wipro and Tata Consultancy Services are up by around 4.25% and 3.5% respectively. A host of other stocks from the IT space have also recorded handsome gains.

Reliance Industries, State Bank of India, Tata Steel, Larsen & Toubro and Grasim Industries are up by 2% – 3%. Ranbaxy Laboratories, Reliance Energy, Hindustan Unilever, ICICI Bank, Ambuja Cements, NTPC and ACC have also moved up sharply.

Out of 2663 stocks seen in action on BSE, 1546 stocks are up in the positive territory. 1058 stocks have posted losses and 59 stocks trade flat.

Mr. Rakesh Rewari, Deputy M.D., SIDBI said “We will open branches in the industrial clusters of Kolapur in Maharashtra and Chindwara in Madhya Pradesh in the coming month”.

SIDBI is not in the business of direct loan providing. It extends funds to the Micro, Small and Medium Enterprises (MSMEs) through banks and other institutions. It has already opened branches in clusters of Alwar in Rajasthan, Trichi (Tamil Nadu) and Kozhikode (Kerala).

India’s approx 13 million SMEs contributing 39% to the country’s manufacturing sector are housed in over three hundred fifty industrial clusters.

Finance Minister Mr. P. Chidambaram has declared two funds of Rs two thousand crore in SIDBI in the Budget for this financial year for setting up of risk capital financing and for enhancing refinance capability to the MSME sector.

People who need home loans and car loans can now bargain for a better deal. It is also expected to make the borrowing cheaper for businesses.

Industry analysts say that this move was inevitable. Over the last couple of quarters, bank lending had dropped considerably after RBI raised interest rates in an attempt to contain inflation. The credit-to-deposit ratio, which was at a high of 90%, is now 55%. With borrowers shying away, banks are flush with funds. Bankers would like to have people and businesses borrow more because that will help the economy grow.