RBI advises banks to scale down commercial real estate exposure

MUMBAI: The Reserve Bank of India (RBI) Governor Shaktikanta Das urged Indian banks to reassess and potentially wind down their exposure to the commercial real estate (CRE) sector.

The RBI governor made this cautionary address at the Future of Finance Forum 2024 in Singapore while talking about the insidiously increasing stress in the real estate assets the world over.

 This call from the RBI Governor comes amid heightened global stress in the commercial real estate (CRE) markets, where liquidity pressures and rising vacancy rates are increasing risks.

Beware of CRE exposure

Das emphasised that banks with significant CRE exposure are particularly vulnerable to both expected and unexpected losses.

Given the high CRE coverage ratios in loan portfolios, he advised banks to prepare for potential liquidity squeezes, noting that regulators should stay vigilant to prevent undue stress on balance sheets.

“Banks need to be cautious, as the sector’s instability could undermine financial stability if left unchecked,” Das warned.

CRE prices slumped globally

Globally, CRE prices have slumped by 12 per cent in real terms over the past year, according to the International Monetary Fund (IMF), exacerbating the risks faced by institutions heavily invested in this sector.

In India, CRE lending has grown by 22.8 per cent year-on-year to Rs4.21 trillion as of June 2024, reflecting the growing reliance on real estate lending despite the inherent risks.

Das’ remarks indicate the central bank’s concern over mounting pressures in the real estate market and its potential ripple effects on the banking sector.

 He urged banks to take proactive measures and consider reducing their exposure to safeguard against liquidity crunches and investor anxiety

Inflation

In addition to his concerns about real estate, Das touched on inflation trends, reiterating the central bank’s cautious stance on interest rates.

With inflation levels currently below the Reserve Bank’s 4 per cent target, Das underscored the importance of maintaining vigilance, noting that food price hikes could still pose risks.