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RBI mulls hike in risk weightage to realty sector

In a latest development it has surfaced that RBI is thinking of increasing the risk weightage of loans extended by commercial banks to the realty sector from 100% to 125%.

The impact of such a decision, if it is implemented will increase the cost of borrowings of real estate companies. This is because the banks will have to set apart a higher percentage of their capital there they were required to do so earlier. At 100% risk weightage, banks have to set apart Rs.7 for every Rs.100 lent. If the weightage is increased to 125%, then banks will have to set apart Rs.8.75 of capital instead of Rs.7.00 earlier.

The impact on cost of borrowings could be 0.25% higher for real estate companies that wish to borrow from banks.

It appears that RBI is concerned about asset bubbles emerging in the real estate sector.

This, development will prove bad for real estate companies that are just recovering from an extraordinary slump in demand!

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