Financial service company Moody's on Thursday said that the recent revision of the asset quality recognition norms for the real estate sector by the Reserve Bank of India (RBI) is credit negative for the Indian banking system.
On February 7, the RBI loosened asset quality recognition norms for Indian banks by allowing them to not classify real estate loans as restructured for one year if the project is delayed for reasons beyond the real estate developer's control.
"The measure is credit negative for Indian banks because it will defer the recognition of such loans from the real estate sector, and by extension appropriate loss provisioning against them," Moody's said in a report.
Property developers will have an additional year to address their funding issues before the banks have to classify a loan as restructured.
However, as per the report, while it will alleviate near-term asset quality risk to the banks from the real estate sector, it will not address the credit issues facing real estate developers.
Developers are facing funding challenges because non-banking financial companies, the key lenders to the sector, are facing funding challenges of their own, it said, adding that property sales have also slowed, resulting in high unsold inventory.
"Tight funding conditions are straining developers' ability to complete projects, and by extension their solvency," it said.