Invest In India

The Government is considering a two-pronged strategy to pull the real estate sector from its current morass and credit crunch. The strategy essentially revolves around reducing the risk element for banks in lending to the sector, where many foresee a slump.

According to an official in the Prime Minister’s committee of officers set up to deal with industry-related problems, the government may bestow industry status to commercial real estate making lending easier to the sector. The sector has been suffering due to fears of the real estate bubble bursting. In addition, officials in the committee have suggested that the credit risk assessment may be split into two — one for the construction component and the other for land. If the two steps are taken, commercial lending rates for developers may come down.

“If a particular sector is treated as industry by the government, it becomes eligible for funding under the priority sector. The small and medium players in this industry will then be able to access a part of the funds that banks need to lend to priority sector as per the RBI guidelines,” a senior banking official said. On the other hand, if the risk element is split into two, the credit risk assessment (CRA) attached to the sector will be pared and the collateral or back up that a bank needs to have while lending to this sector comes down. “While a higher risk element is attached to land, a lower risk is associated with construction. So far, the two are treated as one composite whole while assessing risk. So, we may consider a split to infuse activity in this sector,” an official in the know said.

A large number of players including DLF’s KP Singh had met the Prime Minister and Finance Minister to discuss the problem of fund crunch for the industry. “Housing and construction are important growth drivers in any economy. I have impressed upon the banks to deliver credit at the appropriate price after assessing the risk and the credit worthiness of the borrowers,” Finance Minister P Chidambaram had said after a meeting PSU bank chiefs.

The move is being considered at the highest levels in the government, even though it may take some time to arrive at a result with the government keenly watching the credit situation at home and how the situation changes with the US economy now reacting to a new President-elect.

India Real Estate News, November 2008