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Banks are getting tougher on lending
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| Words: 1955 | Submitted: 02-Aug-2011
62.0% | Number of pages: 8 | Filetype: Word .doc
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DescriptionWhy banks are tightening interest rates
EFFECT OF 2010 FAKE HOUSING LOAN SCAM ON LENDING REFORMS BY BANKS TO THE COMMERCIAL REAL ESTATE COMPANIES
In a season of scams that has rocked the markets as well as Parliament, the latest one involving LIC Housing Finance and several other banks dolling out crores to real estate developers may just have a silver lining for home-seekers. The bribes-for-loans scam that was brought to light in the last week of November led to lender’s declaring that they would scrutinize all high-value real estate loans. While even the finance ministry has said that bank exposure to questionable dealings were low, the scam does present the probability that some of the lending extended by banks might have exposed them to risks.
Market watchers argue that cash flow into the realty sector may be tightened as lenders become more cautious when approached for fresh loans above Rs 50 crore. As a result of this, they say, developers will be compelled to drop prices of their projects in order to bump up their liquidity position. This is great news for home-seekers who have been adopting a wait-and-watch policy owing to the high prices of real estate.
However, real estate companies are quick to point out that the scam was an isolated incident involving just a few players. While the debt market may become more restrictive and screening processes tightened, major developers say the incident has been blown out of proportion and will not impact the market. Still, smaller players in the real estate market who are not in a position to raise debt funds because of tightened lending norms and in addition who do not qualify for private equity funding may be forced to reduce their rates.
On November 24, the Central Bureau of Investigation (CBI) arrested eight officials of public sector banks and financial institutions and alleged that officers in the top and middle level management in firms including Bank of India, Central Bank of India, Punjab National Bank, LIC and LIC Housing Finance Ltd were receiving “illegal gratification” ? read bribes ? from private financial services company Money Matters.
The “gratification” was doled out by Money Matters, which acted as a middleman for realty firms. Companies such as DB Realty, Emaar MGF, Lavasa, etc, continue to require money to fund their projects, but are never certain if their loans will be sanctioned. This is where financial service firms come ...
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