Banks to hike lending rates on commercial realty loans

Bankers today said Reserve Bank's decision to up commercial real estate property loan provision of lenders may force them to hike lending rates to the sector in the near term.

Banks are contemplating a rate hike of anywhere between 0.5-1% in commercial real estate loans in the near future to pass on the burden of high provision to customers, a senior official of state-run, Union Bank told PTI here.

"This (high provisioning) will really impact the credit flow to the real estate sector and will leave no option to banks but to increase their lending rates on commercial real estate loans by 0.5-1%," the official said on condition of anonymity.

Announcing its quarterly review of the annual monetary policy, Reserve Bank governor, D Subbarao asked banks to provide 1% of a loan given to commercial real estate as a provision, up from 0.4% now.

These loans comprise those given to builders for construction of commercial properties like offices, malls, entertainment zones and hotels.

Though the Reserve Bank's move is being viewed as a prudent measure to avoid asset bubbles in the system in the long term, bankers said this "extra cautiousness" may hamper the business.

A top IDBI Bank official said besides an imminent hike in interest rates, banks may also turn extra cautious to lend to commercial realtors, given the indication from the RBI on asset quality to this segment.

A senior official with state-owned Dena Bank said that the loan demand from commercial realty sector may largely get impacted with the Reserve Bank's move.

"Even now, there is no demand from manufacturing sector and enquiries coming mainly from the commercial realtors. This development (from RBI) may further hit the credit flow," the official said.

The Reserve Bank also asked banks to hike their loan loss coverage ratio to 70% by September 2010.

As of now, banks are offering loans to commercial real estate companies at a little over to the bank prime lending rate.