MUMBAI: Reserve Bank of India (RBI), in an attempt to prevent an asset bubble in the real estate segment of the economy, has hiked the provisioning requirement for advances to the commercial real estate sector.

In the second quarter review of the credit policy announced today, the central bank has raised the exposure level for banks to the sector from 0.40% to 1%.

The impact - higher cost of loans for real estate companies, higher prices of properties that will lead to curbing demand....

"In view of the large increase in credit to the commercial real estate sector over the last one year, and the extent of restructured advances in the sector, it would be prudent to build cushion against likely non-performing assets (NPAs).

"Accordingly, it is proposed to increase the provisioning requirement for advances to the commercial real estate sector classified as ‘standard assets’ from the present level of 0.40% to 1%," the central bank said.

The stock market has reacted very negatively to the move, and the BSE Realty Index has dropped over 7%...

Ravi Ramu, executive director, Purvankara Projects, said the move will impact small projects...

Impact on real estate companies
Loans to real estate developers to become expensive
Cost of borrowing will increase for developers
Currently, Real estate companies getting loans at PLR of 11-11.50%
Reports says banks are expected to raise interest rates by 50-75 bps

Analysts Take
Not much impact as real estate loans mostly at fixed rates
Afforadable housing to be impacted