Cost of houses pretty high, there's scope for reduction: RBI

Reserve Bank of India deputy governor S S Mundra said on Wednesday there is a need for price correction in real estate sector, especially given the high inventory levels with developers.

"I believe there is enough scope for home prices to come down from the higher perch because of huge inventory pile-up in several markets," he said addressing a gathering of realty players in the financial capital.

"In a country where over 60 per cent of the population lives with less than $2 a day, the cost of houses are still pretty high," he said, pointing to an RBI report which said there was a huge shortage of dwelling units.

Mundra said that housing shortage is very severe among the weaker sections.

Findings of an internal RBI panel report indicated that over 58 per cent of people from the economically weaker sections and over 39 per cent from the low-income groups do not have access to housing, he said.

The senior RBI official, who assumed office on July 31, a day before he was to retire from the state-run Bank of Baroda as its chairman, said developments in construction technologies should make it possible for developers to bring down home prices.

The central banker also spoke out strongly against the practice of loans for a second and third house, saying bank credit must be used for ‘productive purposes’ and not for ‘speculation’.

"You must realise that at the current stage of development of our country, we need bank credit more for creation of productive assets and less for speculative activities.

“We would not like to create a situation where bank finance is being used by a selected few for buying

several houses as an investment and thereby creating artificial demand bubble," he said.

It can be noted that the Reserve Bank has always been guarding against a possibility of an asset price bubble and undertaking multiple measures to check the same.

Meanwhile, Mundra dismissed criticism of a fall in bank credit to the realty sector by referring to data of over the past five years.

He said allocations to the realty sector have grown at 14.63 per cent per annum between March 2009 and March 2014 to Rs 9.06 lakh crore (Rs 9.06 trillion).

Mundra also said there is a natural affinity for banks to lend to the realty sector as the asset quality of exposure have been much stable compared to the overall scenario.

He also dismissed suggestion of including taxes like stamp duties and registration charges while lending, saying, banks grant loans only as per the realisable value of the asset.

On the demand for reducing the risk weight on the sector exposures, Mundra hinted at it being untenable, saying the risk weights and provisions are ‘calibrated on default probabilities’.

He said the demand to increase external commercial borrowings by realty players is tough to accept, adding, "Foreign exchange exposures are subject to volatility and we have seen the outcomes it can lead to very recently."

Admitting that there is merit in the argument for long-term funding for the sector, but he said the banking system, which operates amidst pressures on the asset liability mismatch front, cannot do this.

Ideally, banks should originate a proposal, after which the newly-introduced real estate investment trusts take over the asset and there are securitisation transactions, which should ultimately lead to transitions into a strong bond market, he said.