: The Reserve Bank of India (RBI), worried about soaring asset prices, has ruled out one more round of restructuring of bad real estate loans which may increase non-performing assets of banks, but bring down prices of homes as developers sell off properties to pay lenders, said at least two people familiar with the matter.
“Let them lower the prices and clear their inventory,” a senior RBI official had told bank chief executives ten days back. The banks were seeking permission continue classifying some bad real estate loans as standard assets even after developers failed to pay.
One more restructuring would rather be a boon for developers to hold on to prices and profit, while hurting consumers, the official had said.
“Banks are wary of the risk associated with commercial real estate because demand for commercial space such as malls has come down and (at the same time) there is a decline in demand in the residential sector across all income groups,” said AC Mahajan, chairman and managing director of Canara Bank. “This problem cannot be solved by repeated restructuring of loans, but by reviving the market by lowering the price, making property more affordable and showing the customer some economic value in their purchases.”
The RBI allowed banks to restructure loans to both manufacturers and developers and continue showing bad loans as standard assets to save banks and developers from financial strain after the collapse of Lehman Brothers in 2008.
That was for only those loans where the borrower was regular in repaying dues until September 1, 2008 and where the bank was able to restructure it by March 31, 2009. While this helped banks and developers, consumers were at the receiving end since real estate companies held on to properties at high prices as they were not obliged to pay immediately.
The subsequent pick up in economic activity and the re-election of Manmohan Singh as the prime minister in May 2009 pushed up all asset prices, including real estate, to levels almost close to those prevailing before the credit crisis.
“There are signs that high levels of global liquidity are contributing to rising asset prices,” RBI governor Duvvuri Subbarao said on January 29 while reviewing the monetary policy.
The total outstanding loans of banks to the real estate sector stood at Rs 88,581 crore as of November 2009, according to RBI data. The asset classification norms, which decide when a loan is to be treated as a non-performing asset, are much stricter for non-manufacturing companies which includes property developers.
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