At a time when concerns regarding the build-up of asset bubbles in emerging economies have resurfaced, RBI Governor Raghuram Rajan has asserted that he is “not overly worried” about the flow of bank credit to the country’s real estate. This is despite the strong loan growth to the realty sector in the last couple of years, which has come at a time when demand has slowed sharply and inventories have been building up.
Rajan, in his reference to the issue during a post-policy conference on October 1, attributed his confidence to that fact that the RBI has put a pretty hefty discount on the loan to value. “At this point, as far as credit to the real estate (sector) to buy real estate goes, I am not overly worried because we do put a pretty hefty discount on the loan to value. The loan has to be for most houses at most 80 per cent of value plus and I am not crowing about this, but I am being realistic, there is often a cash component also in these purchases which is pure equity that the buyer has in the house. So to that extent, there is a fair amount of cushion below the bank’s loan,” Rajan said.
Even though loan growth to real estate sector had been quite strong, the central bank governor said it was still a “relatively small portion” of bank balance sheets and that there is “a sufficient equity cushion” as of now. “Going forward we will have to see how the real estate prices evolve and at what point we start getting more concerned, but as of now I am not overly concerned barring a few locations where it seems frothing,” he added.
Rajan had, in an earlier interview in the Central Banking Journal in August had cited the possibility of yet another financial crash following the steep rise in asset prices.
The Housing Finance Market
The country’s housing finance market seen a significant expansion in late 1990s and early 2000s with the entry of scheduled commercial banks (SCBs) in a big way. The housing loan portfolio of both SCBs and housing finance companies (HFCs) has grown significantly over the years, with the housing loan portfolio of financial institutions (SCBs and HFCs) increasing from Rs 4.60 lakh crore in 2010 to Rs 8.90 lakh crore in 2014 — a CAGR (compounded annual growth) of about 18 per cent. At present, around 60 housing finance companies are registered with the sector regulator — the national Housing Board, of which around 18 are deposit taking ones.
As per the NHB report on trend and progress of housing in India 2013, the share of HFCs in the total housing loan portfolio of the country was 46 per cent for 2012-13 while the total outstanding housing loans of HFCs as on March 31, 2013 stood at Rs 2.90 lakh crore.
Realty FUnd flows Vs Total Bank Credit
So, while there has been a sharp growth in annual inflows into the sector, the RBI derives comfort from the fact that housing loans, as a percentage of GDP in India, has remained quite low at around 9 per cent, which is significantly lower than the levels achieved in most of the developed countries. Further, the demand, in absolute terms, is likely to be buoyant, considering that the housing shortage in the urban areas was estimated, as of 2012, at 18.78 million units while in rural areas it is estimated to be more than 40 million units.
“The housing market in India is influenced by both demand and supply side constraints. The growing middle class, income levels of the people, cyclical conditions, urbanisation are demand drivers that have impacted the housing sector while the major supply side constraints include the lack of availability of land, finance at reasonable rate, infrastructure, legal and regulatory framework and the limitations of the private and other stakeholders to provide low income housing,” an industry expert said.
Residential Sector Paradox
A report titled ‘2014 Outlook: Real Estate Sector’ by India Ratings and Research, the Fitch group’s research arm, had hinted at the prevailing paradox in the residential segment of the Indian housing sector, where the prices of residential units have risen continuously since FY09 even as end-user affordability was on the decline. The “residential demand, according to India Ratings, has been hit by the continuous rise in prices and persistent negative sentiments”, with the total area sold in sq ft terms decreasing in the first half of FY14, a trend expected to continue in the first half of FY15 as well.