Banks tighten lending for commercial realty

Banks are getting tough with developers of commercial projects such as office buildings, malls and shopping centres--a fallout of the corporate loan scam that came to light last year. Meanwhile, several large property developers have to repay loans in the coming months.  Builders seeking fresh loans have been asked to meet more stringent conditions, including demands to produce five-year lease agreements with tenants, and having to settle for considerably lower borrowings against future rent receivables, two bankers said. Indian Overseas Bank, for instance, will lend to develop- ers only if they produce a five- year leasing agreement with a lock-in period for tenants. “This is what banks do at this moment,“ said M. Narendra, Chairman and Managing Director of the public sector bank. “This way, you can be sure of the repayment capacity of the borrower.“  Banks grew wary of lending to commercial real estate projects after several of them turned sour during the slow- down and developers struggled to repay debt. Their worries increased when in November the Central Bureau of Investigation nabbed eight senior officials of state-owned banks and other financial institutions for irregularities in lending to builders. Volatile sector The Reserve Bank of India (RBI) had been warning banks even earlier about the high- risk nature of realty, terming it a “sensitive sector“ along with capital markets and commodities because of likely price fluctuations. Anand Gupta, honorary treasurer of Builders' Association of India, an industry body of construction contractors and builders, said no new commercial real estate project has been launched in the past couple of months. “Banks have not approved any fresh proposals in the last one-two months,“ he said. “Most banks are even hesitating to release sanctioned money.“