In spite of the UPA’s policy focus on low-cost housing and the impetus the government wants to give the construction sector to accelerate economic growth, the Reserve Bank of India (RBI) has refused to provide the benefits associated with “infrastructure status” to the housing sector.
Virtually turning down a finance ministry proposal, the central bank cited concerns about the likely adverse implications of an increase in banks’ exposure to the ‘risky’ sector, especially when banks’ non-performing assets (NPAs) are on the rise in a slowing economy.
Infrastructure status entails multiple benefits such as tax concessions and easier access to overseas loans, besides relatively cheaper bank funds on a priority basis. Currently, scores of housing projects across the country are stuck for a variety of reasons including want of requisite clearances, cautious lenders and higher cost of finance.
In line with the government’s policy, in the case of sectors accorded infrastructure status, the RBI classifies the loans as NPAs only if the borrower fails to commence commercial operations within two years from the original date set whereas other projects will get the NPA tag for a six-month lag.
In the aftermath of the 2008 global financial crisis, several developers in India too found it difficult to repay their dues. The RBI, on its part, has been keen to ensure that the banks’ risks owing to their exposure to the real estate sector are reduced so that there are no systemic problems.
The external commercial borrowing access for the sector was restricted to projects, rather than realty firms, with tough end-use norms as a measure of caution.
In 2009, the central bank had increased the provisioning norms for banks in respect of advances to the commercial real estate sector classified as ‘standard assets’ to 1% from 0.4%. This means of every Rs 100 loaned to a commercial real estate project, the bank will have to set aside Re 1 as a safety net against potential bad debt. In case the secured asset is substandard, the provisioning is as high as 15% (from 10% earlier). The finance ministry wants these norms to be relaxed to give a boost to the construction sector.
The construction sector, which accounts for roughly 8% of the country’s gross domestic product, expanded at 8.8% in the first half of the current fiscal, compared with 4.9% a year earlier, although the pace of growth slowed to 6.7% in the three months through September 2012 from 10.9%