Chairman CS Setty speaks about SBI working on construction finance, particularly on residential real estate but warns about aggressive players burning their hands; SBI has negligible presence in sector.
State Bank of India, which has a negligible presence in construction finance for housing projects, is working out a framework which would cautiously increase its funding to the sector.
The country’s largest lender is slowly building a book on commercial real estate, Chairman CS Setty said, while stressing on accountability and transparency to be key in determining interest rates for such loans.
“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.
For financing construction, residential real estate developers primarily depend on advances from customers in the form of bookings as institutional credit is hard to source. Developers also tap 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, Setty said developers should ensure at least 40-50% 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,” the SBI chairman said.
Asked about the reduction in interest rate on construction finance, Setty 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 following the Reserve Bank of India’s announcement on 5 December of a repo rate cut by 25 basis points.
Setty advised non-banking financial companies (NBFCs) engaged in the housing finance sector to bring down their operational cost so that they can provide loans at cheaper rates.
