With a surprising recovery in the realty sector, the banking regulator, RBI has issued circular asking banks to look for loopholes while lending to developers.

The circular said "It has been observed that some of the companies operating in the real estate sector have significant exposure in the form of advances, investments, etc to their subsidiaries and other group or related entities...As a matter of prudence, banks may meticulously assess the inherent group risk of their borrower accounts falling under the purview of real estate sector." The circular said that this practice made loans risky for banks.

RBI's step was triggered by a rise in lending by the banks after a year long lull. The real estate prices swooped immediately after the collapse of Lehmann Brothers. New loans extended by banks rose to Rs 56,000 crore between July and September against a drop of Rs 7,400 crore from April to June.

A C Mahajan, chairman of Canara bank said, "This is just a cautionary note from RBI. Most banks are already following this philosophy"

RBI has been apprehensive of the rising real estate prices ever since the Asian Meltdown of 1997. Observing an increasing trend of real estate investments, RBI increased the loan risk weightage for the banks, a measure which required lenders to have more capital to give the same loan. It also tightened home loan margin norms, which led banks to cap the loan at 80% of the property value.

In the coming weeks, the real estate developers will try to figure out reasons for RBI coming out with this circular. Rajeev talwar, group executive director of DLF, said "Since RBI has come out with a directive, industry bodies like NAREDCO and BAI would look to know the root cause behind it," said Rajeev Talwar, group executive director of DLF.

RBI circular is specifically aimed at the large firms. It says "While assessing the loan requirements of large builders/land developers, they (banks) may carefully analyse the financial credentials/viability of the borrowers on a consolidated basis supported by the consolidated accounts/position of the group. They may also examine the financial credentials/viability of the relevant unconsolidated related entities such as special purpose vehicles"

Some of the real estate developers like Unitech and HDIL have started hiring again to launch new projects and speed up the execution of existing ones. The companies expect high demand in the coming fiscal quarters with the economy showing clear signs of a revival in the fiscal year started April 2009.