The Reserve Bank of India (RBI) has kicked off an exercise to gauge the extent of bad loans of banks in the real estate segment

Impact of the subprime crisis in the US and Europe on Indian banks :

The latest exercise seems to be a follow-up on the meeting that RBI had with banks during the second week of September to discuss the impact of the subprime crisis in the US and Europe on Indian banks.

RBI officials wanted to assess whether Indian banks had any exposure to such loans while attempting to gauge the impact of the crisis on the broader Indian economy. In fact bankers have been told to keep central bank officials posted of any developments, including marker rumours.

Bad Home Loans :

RBI now wants to have a fix on the level of bad loans in the banking industry, especially relating to home loans and commercial property. It has commissioned a survey on bad loans in both residential mortgages and commercial real estate loans. The regulator has sought details on standard advances in the sector from banks for three fiscals — 2001-02, 2002-03 and 2003-04. RBI wrote to some banks on September 14, directing them to respond to queries by September 28, bankers said.

The impact of a higher interest rate :

Banks have been told to furnish details of bad loans generated during 2004-05, 2005-06 and 2006-07. RBI wants banks to submit details of all such loans at the end of March 31, 2005, 2006 and 2007. The impact of a higher interest rate on borrowers and consequent default gets reflected only with a bit of a lag. Bankers reckon that this could be the reason for the regulator calling for data of loans which had originated a few years ago.

Aggressive lending :

Commercial banks have, over the past four years, been lending aggressively to the real estate sector. In fact, for several banks lending to residential mortgages constitutes over 50% of their total retail exposure. Outstanding real estate loans for banks, according to RBI data, rose from Rs 13,546 crore in March 2005 to Rs 45,328 crore at the end of March 2007

During the last couple of years, RBI has clamped down excessive lending by banks to the real estate sector on fears of an asset price bubble.

Related Stories :

1. Role of the Reserve Bank of India(RBI) in the growth and slowdown of the Indian real estate market

2. "Sale of residential property dropped by over 70 percent in May-June 2007," the Associated Chambers of Commerce and Industry report

3. Rise and Fall of Subprime Lenders Began on Wall Street