RBI to cap banks' home loan exposure

The frenzied pace of growth in home loans disbursed by commercial banks may slow down with the Reserve Bank of India classifying banks' lending in this sector as an exposure to the real estate sector. By doing so, effectively the central bank has capped banks' exposure to home loans.

Real estate is one of the three sectors (the other being capital market and commodities) categorised as sensitive for the banking industry.

The RBI has not recommended any cap for banks' exposure to these sectors but left it to the respective bank boards to decide the limit on their own.  An exposure ceiling of 15 to 20 per cent for any sector is considered prudent by bankers as it protects the financial entities from excessive risk.

The real estate exposure of public sector banks as on March 31, 2006, ranges from 8 per cent to as high as 17 per cent of total advances.

Private sector ICICI Bank, the most aggressive bank on the retail banking front, has real estate exposure of around 32 per cent, banking sources said.

ICICI Bank officials were not available for comment.  "We still have some room to provide home loans," said the chairman of a large public sector bank.

The chairman of another public sector bank said, "For most PSBs, the home loans are small and widely distributed. The average size of home loans is around Rs 5 lakh. The RBI move was more driven by the irrational rise in property prices in big cities."

Most bankers consider the RBI move too stiff as home loans are fully secured and are widely distributed.

Several banks were not willing to disclose the ceiling their boards have stipulated for exposure to the real estate sector. The RBI included home loans (residential mortgages) as part of real estate exposure in 2005-06, when banks feasted on the retail loans boom.

Individual bank boards have been asked by the central bank to decided on a cap depending on their respective risk appetite.  The home loans portfolio of the public sector banks nearly doubled to Rs 85,995 crore (Rs 859.95 billion) at the end of March 2006 from Rs 43,228 crore (Rs 432.28 billion) at the end of March 2005.

ICICI Bank, a key player in the residential mortgages market, alone disbursed Rs 25,740 crore (Rs 257.40 billion) of home loans in 2005-06, which took its outstanding home portfolio as on March 31, 2006 to over Rs 40,000 crore (Rs 400 billion).