RBI Governor Warns of Risks for Banks with High Commercial Real Estate Exposure

RBI Governor Warns of Risks for Banks with High Commercial Real Estate Exposure

Reserve Bank of India (RBI) Governor Shaktikanta Das has raised concerns about banks with significant exposure to commercial real estate (CRE), suggesting they could become targets for short sellers. Speaking at the Bretton Woods Committee’s Future of Finance Forum in Singapore, Das highlighted the potential vulnerabilities these banks face due to their high CRE coverage ratios and the risk of liquidity squeezes.

"Banks are highly sensitive to both expected and unexpected losses in commercial real estate," Das said. "Liquidity pressures may arise if short sellers target these institutions, potentially eroding investor confidence further. Proactive regulatory measures can help mitigate risks to bank balance sheets and ensure systemic stability."

Indian banks have been expanding their lending to the commercial real estate sector, reflecting renewed market confidence. According to RBI data, the commercial real estate portfolio of scheduled commercial banks (SCBs) surged by 22.94% year-on-year, reaching ₹3.96 lakh crore as of March 2024. This increase represents a significant jump from previous years, with a ₹74,006 crore rise in lending between March 2023 and March 2024, compared to a ₹25,342 crore increase the year before. This growth has been supported by improved regulations, deleveraging by developers, and the growing role of Real Estate Investment Trusts (REITs) in bringing additional equity into the market.

Despite this growth, lending against the value or liquidity of assets is viewed as riskier due to its sensitivity to price fluctuations and potential to create asset bubbles. The RBI is contemplating new rules to enhance provisioning for project financing but plans to implement these changes gradually to avoid impacting banks' profitability. Reports suggest that projects nearing completion might receive some leeway in meeting these new requirements.

In addition to addressing financial stability concerns, Das expressed confidence in India's economic prospects. He estimated the country’s potential growth rate at 7.5% or more, slightly above the RBI’s full-year forecast of 7.2% for 2024. Although India’s merchandise exports have not performed as well as expected due to weaker external demand, Das noted that services exports have shown improvement.