SBI Rethinks Housing Finance Policies to Enhance Accountability

The State Bank of India (SBI) is set to reassess its financing policies for residential construction projects, focusing on transparency, accountability, and sound project management as key factors in determining interest rates. This announcement was made by SBI Chairman C S Setty during an event hosted by the real estate developers’ body CREDAI in Mumbai on December 20, 2023.

Currently, SBI has a minimal presence in the sector of residential construction finance, although it has been gradually increasing its investments in commercial real estate, particularly in office spaces. Setty acknowledged the challenges faced by developers in this area, noting, “Many who were aggressive in this segment in the past have burned their hands.” He urged developers to practice caution against overleveraging and poor risk management.

Emphasis on Project Stability and Risk Management

Setty emphasized that the confidence of lenders like SBI is closely tied to the stability of real estate projects. The bank’s chairman stated, “Transparency, proper project management, and effective risk management give us confidence. Accountability is what will eventually enable developers to access construction finance at more affordable costs.” This perspective highlights SBI’s cautious approach as it seeks to expand its role in the real estate financing sector.

Regarding commercial real estate funding, Setty indicated that SBI prefers developers to secure at least 40–50 percent tenant commitments before availing construction finance for office projects. He expressed concern over the potential for unoccupied buildings, stating, “We would not like a situation where a building is constructed but remains unoccupied.”

Interest Rates and Competitive Financing

On the topic of interest rates for construction finance, Setty explained that these rates are linked to the Marginal Cost of Funds-based Lending Rate (MCLR), which is adjusted according to fluctuations in term deposit rates. Earlier in December, SBI revised its MCLR and fixed deposit rates for select tenures, indicating a proactive approach to adjusting its financial offerings.

Additionally, Setty advised non-banking financial companies (NBFCs) engaged in housing finance to streamline their operational costs to provide loans at more competitive rates. This call for efficiency underscores SBI’s commitment to fostering a more sustainable and responsible lending environment in the real estate sector.

This strategic shift by SBI reflects a broader trend in the banking sector, where financial institutions are increasingly prioritizing responsible lending practices while navigating the complexities of the real estate market. The emphasis on transparency and accountability is likely to shape the future of housing project financing in India.