While the RBI is reportedly thinking of capping loans to real estate, many believe any such move is a bad idea.
Rupa Rege Nitsure, Chief Economist, Bank of Baroda
The structural shift in the non-food credit growth in favour of "overheated" sectors, that too with the economy's rapid growth, is worrisome
The RBI has been giving repeated warnings to banks about the escalating prices of housing and real estate in the country. It has also been monitoring property loans bank-by-bank and branch-by-branch, and making direct contact with those deemed to be lending too aggressively.
From the risk management perspective, the RBI has increased the risk weights for advances to commercial real estate initially from 100 per cent to 125 per cent (in July 2005) and then from 125 per cent to 150 per cent (in April 2006).
It has also increased the provisioning requirements for standard advance under commercial real estate and housing loans of Rs 20 lakh (Rs 2 million) and above from the earlier 0.4 per cent to 1.0 per cent in April 2006.
As the protector of "financial stability", the RBI has every valid reason to raise its brows. Indian banks have gone on a lending spree since the second half of 2004-05 with overall credit growth exceeding 30 per cent in the last one year.
While credit to agriculture and industrial sector has increased by 27 per cent and 37 per cent respectively, retail credit has surged to 47 per cent. According to the latest data released by the RBI, housing loans are up 54 per cent (y-o-y) and commercial real estate 104 per cent (y-o-y) by June 2006.
As a result, the share of retail credit in total banking credit has increased from 26.8 per cent in June 2005 to 27.3 per cent in June 2006.
There are two major concerns for the RBI at this juncture, which it feels have potential to endanger financial stability - first, credit is growing at over 30 per cent for the third year in succession against a deposit growth of 18 per cent to 19 per cent, and secondly, credit to "real estate and housing sector" is leading the list, when Indian property prices are rising disproportionately too fast.
One should not forget that "real estate and housing" is a multiplier industry. The impact of the growing crisis in this segment affects a wide range of industries and workers. Steel, cement, lumber, wood, furnishings, banks and housing finance companies are closely linked to this sector, wherein asset prices have been moving too fast.
Most of the banks have responded to RBI measures by hiking the home loan rates by 50 to 75 basis points in the last six months. Yet, the boom in real estate market is not showing any signs of abating.
In fact, property prices have appreciated by 60 per cent to 100 per cent over the past one year in most towns. Furthermore, Indian property developers intend to raise a massive amount of $4 billion in domestic and international share offerings by March next year.
Analysts estimate India's property industry will be worth $50 billion in sales by 2010, from $12 billion last year. Property companies are reported to have plans in the pipeline worth up to three times the value of all the projects they completed in the past five years.
For India, the worrisome thing is the structural shift in the non-food credit growth in favour of sectors, which are "overheated" not just domestically, but also globally.
That too at a time when the country has become one of the world's fastest growing economies. It has well been observed that when the services sector was primarily contributing to growth, India's growth hovered at around 6.5 per cent to 7.0 per cent.
With a broad-based recovery in the manufacturing sector, the overall growth has moved to 8.0 per cent-plus growth.
For taking this growth to 10 per cent-plus level, there is an urgent need to focus on those sectors, where huge mismatches exist between demand and supply such as agriculture and agricultural infrastructure, education, health, power networks, roads, transport systems, ports, and so on.
The most important lesson brought home forcefully by the east-Asian crisis of late 1990s is the importance of a healthy financial sector. Banks can effectively contribute to the overall growth only if they provide credit to sectors that offer highest risk-adjusted returns. The RBI wants banks to not just grow bigger, but also more "diversified" in terms of the risks they are assuming. Otherwise, the Indian dream will remain only a dream!
Sunny Wadhawan, managing director, HDIL
India needs more than 50 urban cities with great infrastructure to move to the next level of growth - what you're seeing is just the tip of the iceberg
No, the Indian real estate market is not over-heated. The economy is witnessing an unprecedented growth across sectors since the last decade. Forget the stupendous growth numbers for a moment and imagine India as the "super-economy" of tomorrow.
The liberalisation programme kick-started in 1991, has catapulted India as one of the most talked-about growth economies in the world.
Sceptics point out caveats to our policy makers on three counts: infrastructure, infrastructure and infrastructure. And this is being built with a visionary zeal, unprecedented perhaps, in the history of modern India.
The government's initiative in accelerating sustainable public-private partnership models for developing roads, power and airports is fuelling global and local investments into the sector.
It is estimated that over $5 billion of investments will flow into the infrastructure and realty sector over the next five years. The government has also taken suitable measures to ensure that the real estate industry evolves to meet global standards.
Changes in the regulatory norms to foster transparency, accountability and service standards are changing the dynamics of the industry. Computerising land records and repealing the Urban Land Ceilings Act in cities such as Mumbai and Delhi will unlock further value into the entire demand-supply equation.
Pre-liberalisation, developers did not have easy access to capital. Today, global investors are investing in companies, which are focused on delivering value to the Indian realty and infrastructure sector.
The government's FDI policy has been extremely favourable to developers and has given the boom a further impetus. FDI-compliant projects have access to capital from institutional investors, banks, PE firms and corporates.
On the cards are path-breaking initiatives such as REMFs and REITs. Land or real estate, which was perceived primarily as a "lumpy" asset will be "liquid" soon. Just as consumers invest in stocks, mutual funds, gold and PF, "real estate" will be an additional choice in their investment options.
And going forward, it is this "liquidity" that will drive the Indian real estate market. As the world moves closer to becoming a global village, capital will flow seamlessly between countries in search of the best investment opportunities.
In 2005, there was an outward flow of around $58 billion into the overseas real estate from four major countries - USA, Germany, Australia and UK.
In a major shift from the earlier period, these investors were investing in not only mature markets but also in emerging markets like China and India. Inflation was contained, primarily due to the linking of India, China, central and eastern Europe to the global economy.
Banks, generally wary of taking huge real estate exposure, are more than willing to lend for real estate.
From an end-user perspective, consumers are raising the benchmarks of this industry. Global travel and lifestyle exposure have increased the aspirations. Consumers are demanding world-class facilities, accessories and "after-sales" from developers.
Easy access to housing loans, rising incomes and nuclear families are also fuelling this boom across all strata of society. Today, the real estate industry is conceptualising projects based on the demographic and psychographic profiling of potential customers.
Greater customer involvement, global quality projects, transparency and accountability are key areas that will differentiate the real estate industry of tomorrow from the way we perceive it currently.
Positive economic and demographic factors have contributed immensely to the demand and price of real estate. With over 200 million households in India, the demand for real estate is increasing everyday.
The demand for land is not only pronounced for residential projects but also for various other projects, such as IT Parks, SEZs, malls and retail chains. The growth in these sectors have spurred demand not only in Tier I cities, but also in Tier II and Tier III towns.
India as a country will need more than 50 fully developed urban cities with state-of-the-art infrastructure to move to the next level of growth. The potential is unlimited and what we are currently witnessing is just the tip of the iceberg.
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