Sensing a correction in the real estate sector, commercial banks have become selective in lending to new residential and commercial real estate projects.

Besides increasing the lending rates, some banks have asked the promoters to increase their share in project funding in an attempt to mitigate the associated risks.

The economic uncertainty and runaway inflation is likely to impact the real estate prices, and this is already evident in some pockets in Mumbai. The decline indicates tough times ahead for the real estate industry, according to bankers. Banks have already turned selective in taking up new funding proposals.

Corporation Bank [Get Quote] chief general manager M Narendra said the situation in the real estate sector will be different from last year. There will be a correction, he asserted.

The Reserve Bank of India has already declared the real estate space as a sensitive sector under its prudential norms. The sector thereby attracts higher risk weightage (banks have to set aside higher amount of capital for real estate exposure) and the lending is closely monitored.

A senior executive with Dena Bank [Get Quote], said, "Banks do not stop taking exposure just because the outlook for a particular sector is bad. Some players are competitive and remain ahead of others". Bank of India is not entertaining any new proposals from real estate sector since last year, according to executive director G S Vedi.

However, there is no 100 per cent ban on extending credit to the existing clients.

Banks are also asking for higher contribution from the promoters and developers in a move to secure their position. For example, banks are asking for a hike in the contribution from 25 per cent to 30 per cent, a senior State Bank of India [Get Quote] executive said. Hence, the promoters have a higher stake in project completion and loan payment.

Keeping with the rising cost of funds and the need for additional capital for risky assets, the banks have increased the lending rates for real estate projects.

The real estate companies are now paying prime lending rates for new projects. The PLRs of most public sector banks is in the band of 12.25 to 12.75 per cent. A year ago, lending was done at a PLR below 10 per cent rate, said the Dena bank executive.

According to Reserve Bank of India data, the banking sector gave Rs 53,897 crore (Rs 538.97 billion) to the real estate sector as on February 15, 2008. The year-on-year growth in credit deployment was 26.7 per cent (Rs 17,361 crore) as against 79 per cent (Rs 18,770 crore) a year ago.

The growth in loans to commercial real estate remained high, notwithstanding some moderation, RBI said in its macro-economy report for 2007-08.