India’s largest lender State Bank of India is working out a framework to increase funding to the residential real estate sector but the approach will be laced with caution, the bank’s top executive said on Saturday.
According to C.S. Setty, chairman of SBI, accountability and transparency would be key factors in determining interest rates for loans in the residential sector. At present, the bank has almost negligible presence in construction finance for housing projects, but it is slowly building a book on commercial real estate, especially office space.
“So how do we work out on the construction (finance), particularly on the residential real estate, is something that we are working on. But it is also a fact that many of the people who have been aggressive on the residential real estate market have burned their hands,” he said, while reminding realtors of past cases of failures due to overleveraging.
Residential real estate developers primarily depend on advances from customers in the form of bookings to finance
construction, given the lukewarm response from institutional credit. They also resort to private financiers for project execution. However, with buyers preferring to move into projects nearing completion to avoid project execution risks, developers’ dependence on project finance is on the rise.
“The stability in terms of transparency, in terms of project management, in terms of risk management, gives us some confidence....accountability is something that is going to give confidence to lenders like us, and you will be accessing the construction finance at a much affordable cost,” Setty said while speaking at an event organised by Credai, a body of real estate developers.
On commercial real estate, the SBI chairman said developers should
ensure at least 40-50 per cent commitment from potential tenants for the upcoming office space to avail construction finance. “We would like a situation where we have a building but not occupied,” Setty said.
Asked about the reduction in interest rate on construction finance, the SBI chief said it is linked to marginal cost of funds based lending rate (MCLR) and revision in MCLR happens in sync with term deposit rates. Earlier this month, the bank revised both the MCLR and fixed deposit rates for select buckets.
The chairman of the country’s biggest lender advised NBFCs engaged in the housing finance sector to bring down their operational cost so that they can provide loans at cheaper rates.