The RBI decision to hike the provisioning requirement of banks for lending to real estate companies from 0.4 per cent to 1 per cent is set to make loans costlier for the sector that has started showing the first signs of revival. Banks will most likely pass on the cost of provisioning to their customers.

DLF group executive director Rajeev Talwar said, “Increasing the risk-weightage for commercial real estate is a negative signal, not required so early in the economic revival process.” Hiranandani chairman and managing director Niranjan Hiranandani feels the increase in the cost of funding will further hurt the growth prospects for the sector.

Given the sharp rise in credit to the commercial real estate sector over the last one year and the extent of restructured advances in this sector, the RBI has also said it would be prudent to build cushion against likely non-performing assets (NPAs). Latest RBI data reveals that growth in outstanding loans to real estate was at 41.5 per cent. This is well above the reported growth in home loans at 5.4 per cent (y-o-y).

As part of its gradual unwinding of the easy monetary policy stance, the central bank has turned its attention to asset prices again. RBI governor D Subbarao told reporters that in commercial real estate, there has been no price adjustment (prices have not fallen enough) though there are lots of vacant spaces.

According to Priyankar Bhikshu, head of consulting and research at DTZ International Property Advisers, “Rising costs of bank loans can adversely impact realty companies’ liquidity position and might force them to pass on the prices to the end users. This, combined with the sluggish sales over the last few months indicates that the sector’s recovery path could see some hurdles in near future.”

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