Bad realty loans threaten to nibble at banks’ pre-tax profit

Source :MUMBAI:21 SEP, 2010, 03.36AM IST,ET BUREAU 




 State-owned banks stand to lose a large chunk of their pre-tax profits in the next fiscal because of bad loans in the real estate sector if property transactions do not pick up. Paradoxically, transactions are thinning out because of high real estate prices. 


According to a report by HDFC Securities, Indian banks have been aggressive in lending to commercial real estate sector, especially during FY06-10. 


During this period, lending to the real estate sector saw a 40% CAGR, increasing bank exposure to this sector to 3.2% from 1.9% in FY06. Net disbursals during March ’06-May ’10 from the banking system to real estate was close to $15 billion. 


Of the total commercial real estate exposure of Rs 95,700 crore, only 22% of the funds have gone to listed companies which implies the remaining 78% went to unorganised, small and medium developers. 


These companies do not have multiple avenues to raise capital, and hence, their high reliance on bank funding. 


“Sensitivity suggests that 10% slippages in loans would impact the estimated FY12 pre-tax profits by up to 18% and networth by 2%,” the HDFC Securities report said. 


Although there is no centralised data on real estate transactions, one indicator for the same is the trend in home loans.


 Despite dominant lenders like State Bank of India continuing to offer special home loan schemes, growth in mortgage has remained sluggish at 10.8%. 


Nine companies have proposed to raise funds amounting to Rs 15,300 crore through the issue of equity shares. 


The draft offer document for the proposed equity issues of most companies show that the funds will be used to complete the ongoing project or to repay loans to banks. 


Clearly, if these companies fail to raise funds, their loans run the risk of turning into non-performing assets. 


Home prices have shot up as developers keen to cash-in on the booming economy have bid land prices to new highs in land-scarce cities like Mumbai.


 For instance, last month, city-based Neepa Real Estate paid Rs 830 crore for an 18-acre plot in Andheri, Mumbai. Earlier, Indiabulls Real Estate successfully bid over Rs 1,900 crore for two NTC mill plots — the 2.39-acre Poddar Mills and the 8.37-acre Bharat Textile Mills property. 


Sanjay Dutt of Jones Lang LaSalle, in his blog, has raised the prospects of a real estate bubble in pockets like Mumbai, pointing out that some properties in central Mumbai peaked at Rs 30,000/sq.ft in 2008 and today stand at 38,000/sq.ft. 


“There is yet another reason for the concern over a bubble building on the market. All developers who had ventured to buy land overseas or across India are now buying only in their primary cities. 


In other words, Mumbai developers are concentrating on acquiring land solely in Mumbai, and the same is happening in Gurgaon. Investments are now chasing these Tier-I markets, and if this continues, there is certainly the probability of a bubble in residential property by the end of the year,” he said. 


According to RBI, the price increase is of 25-40% in large metros, back to the pre-crisis peaks. Further, despite offering attractive rates on loan products by banks, the home loan growth for the system remained sluggish at 10.8% YoY and 2.7% QoQ.


 “Going forward, fresh transactions in the housing segment could remain under pressure due to high interest rates environment and spike in property prices,” HDFC securities said.