ABSTRACT

This project is about lending to commercial real estate and the challenges faced by the lenders in giving the credit to the commercial real estate.

Bank always faces credit risk which is nothing but a risk related to non repayment of the credit obtained by the customer. Thus it is necessary for the banks to check the credit worthiness of the customer in order to mitigate the risk.

This report talks about the commercial real estate lending procedure. Acommercial loanis a loansecured bycommercial property, such as an office building, shopping center, hotels, industrial warehouse, or apartment complex etc. While giving commercial loans proper evaluation of customer is performed i.e. checking financial condition and the ability of the customer to repay the loan in future.

In the beginning this report gives the overview of Indian banking sector. Then starts with principles of lending and then types of lending.

Further we study the lending procedure followed by the bank and risk they faced while doing so. And also check the financial, technical viability of the project proposed.

Finally we will glance into the current industrial analysis of commercial real estate sector and how this industry will perform in future. Whether there is any scope of investment in this industry in future or not.

In the end, I have listed down mu findings and conclusions which I have deduced in the course of 3 months from working with Bank of Baroda.

INTRODUCTION TO INDIAN BANKING SECTOR

Banking in Indiaoriginated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, andBank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is theState Bank of India, which originated in theBank of Calcuttain June 1806, which almost immediately became theBank of Bengal. This was one of the three presidency banks, the other two being theBank of Bombayand theBank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form theImperial Bank of India, which, upon India's independence, became theState Bank of Indiain 1955.

Banking Regulator

The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.

Role of Banks

As per Section 5(b) of Banking Regulation Act, 1949, banking means acceptance, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.

Banks pay a crucial role in economic development of a country as repositories of community savings and as a source of credit. Indian Banking has aided the economic development during the last fifty years in an effective way. The banking sector has shown a remarkable responsiveness to the needs of planned economy. It has brought about a considerable progress in its efforts at deposit mobilization and has taken a number of measures in the recent past for accelerating the rate of growth of deposits. As recourse to this, the commercial banks opened branches in urban, semi-urban and rural areas and have introduced a number of attractive schemes to foster economic development.

The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner. Banks have been playing a catalytic role backward area development, extended assistance to rural development all along helping agriculture, industry, international trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid economic development.

Commercial banks provide short-term and medium-term financial assistance. The short-term credit facilities are granted for working capital requirements. The medium-term loans are for the acquisition of land, construction of factory premises and purchase of machinery and equipment. They also establish letters of credit on behalf of their clients favoring suppliers of raw materials/machinery (both Indian and foreign) which extend the bankers assurance for payment and thus help their delivery. Certain transactions may require guarantees being issued in lieu of security earnest money deposits for release of advance money, supply of raw materials for processing, full payment of bills on the assurance of the performance etc. Commercial banks issue such guarantees also.

EXECUTIVE SUMMARY

TITLE OF PROJECT

Lending to commercial real estate - challenges faced by lenders

OBJECTIVES

To have clear understanding lending procedures. Credits Capacity Collateral Capital Condition

To check the primary and collateral security cover available for recovery of loan. Risk associated with lending. To understand the problems faced by the lender.

RESEARCH METHODOLOGY

DATA COLLECTION

Data was collected from following methods.

Observation Interviews Interaction with the Colleagues Study of old files/documents.

Primary data collection- The primary data was collected by means of interview.Most of the data and information will be collected from my practical experience and queries from the colleagues while doing project at Bank of Baroda. Secondary data collection-This data will be collected from Internet, Companys websites & Magazines, E-circulars of Bank of Baroda.

LIMITATIONS

Survey was restricted to only Bank of Baroda. As a student I wasnt allowed access to the sanctioning part due to the banks privacy policy. Confidentiality of data was another important barrier that was faced during the process of this study.

COMPANY PROFILE

Bank of Barodais an Indianstate-ownedbanking andfinancial servicescompany headquartered inVadodara(earlier known as Baroda) in Gujarat, India. It is the second-largest bank in India, afterState Bank of India, and offers a wide range of banking products and financial services to corporate and retail customers through its branches and through its specialized subsidiaries and affiliates. Bank of Baroda is one of theBig Four banksof India, along withState Bank of India,ICICI BankandHDFC Bank. In addition to its headquarters in its home state ofGujarat, it has a corporateheadquartersin theBandra Kurla complex in Mumbai.

Based on 2014 data, it is ranked 801 onForbes Global 2000list.

The bank was founded by theMaratha,Maharaja of Baroda,H. H. Sir Sayajirao Gaekwad IIIon 20 July 1908 in thePrincely Stateof Baroda, inGujarat.The bank, along with 13 other major commercial banks of India, was nationalized on 19 July 1969, by the Government of Indiaand has been designated as a profit-making public sector undertaking (PSU).

Mission:

To be a top ranking National Bank of International Standards committed to augmenting stockholders value through concern, care and competence.

Motto 2015 -2016:

Race Ahead- From Good to Great

R- Retail LeaningA- Asset QualityC- Capacity BuildingE- Earnings

The Ethics:

Between 1913 and 1917, as many as 87 banks failed in India.Bank of Baroda survived the crisis, mainly due to its honest and prudent leadership. This financial integrity, business prudence, caution and an abiding care and concern for the hard earned savings of hard working people, were to become the central philosophy around which business decisions would be effected. This cardinal philosophy was over years of its existence, to become its biggest asset. It ensured that the Bank survived the Great War years. It ensured survival during the recession period. Even while big names were dragged into the Stock Market scam and the Capital Market scam, the Bank of Baroda continued its triumphant march along the best ethical practices

Business Process Re-Engineering (BPR):

Bank had initiated a major Business Process Reengineering to give a big boost to sales growth by enhancing customer satisfaction and by making possible alternate channel migration thus reinventing itself to challenges of the 21st century. Banks BPR project known as Project- Navnirmaan has altogether 18 activities covering both the BPR and organizational restructuring, aimed at transforming the Banks branches into modern sales & service outlets.

The most important initiatives planned under this project include (1) Conversion of all metro and urban branches into modern centers known as Baroda Next branches; (2) Creation of Automated and Leaner Back Offices like City Back Office (for automated cheque processing etc), Regional Back Office (for faster account opening etc), Establishment of two Call Centers, Creation of Academy of Excellence, Introduction of Frontline Automation at select branches for customer convenience and Organizational Restructuring.New Technology PlatformBank has made substantial progress in its end-to-end business and IT strategy project covering the Banks domestic, overseas and subsidiary operations. All Branches, Extension Counters in India, overseas business and five sponsored Regional Rural Banks are on the Core Banking Solution (CBS) platform.

Bank has been providing to its customers Internet Banking, viz., Baroda Connect and other facilities such as online payment of direct and indirect taxes and certain State Government taxes, utility bills, rail tickets, online shopping, donation to temples and institutional fee payment. Bank has a wide network of ATMs across the country and has also launched mobile ATMs in select cities. Initiatives have been taken to provide corporate customers with facilities like direct salary upload, trade finance and State Tax payments etc. Bank has introduced Mobile Banking (Baroda M-connect) and prepaid gift cards.

SWOT Analysis

Strengths

Weakness

Products and services offered International presence Strong & trusted brand Experienced Staff

Less no of branches compared to competitive banks like SBI, PNB Technically behind then other banks

Opportunities

Threats

Possible to expand more in rural area People are becoming more and more service oriented Dissatisfied competitors customers

New banking licenses given by RBI Foreign banks

BRIEF OVERVIEW OF CREDIT

Credit Appraisal is a process to determine the risks associated with the extension of the credit facility. It is generally carried out by the financial institutions, which provides financial funding to its customers. Credit risk is a risk related to non-repayment of the credit (loan) obtained by the customer from a bank. Thus it is necessary to appraise the credit worthiness of the customer in order to mitigate the credit risk. Proper evaluation of the borrower is performed, this measures the financial condition and the ability of the borrower to repay back the loan in future. Mostly the loan facilities are extended against the security known as primary & collateral. But even though the loans are backed by the collateral, banks are generally interested in the actual loan amount to be repaid along with the interest. For this purpose the customer's cash flows are checked to ensure the timely payment of principal and the interest.

Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous loans, credit cards, CIBIL records etc. are taken into consideration while appraising the credibility of a person. Every bank or lending institution has its own credit department this purpose.

However the 5 C of credit are crucial & relevant to all borrowers/lending, which must be kept in mind, at all times.

1. CharacterThis refers to how person has handled past debt obligation. From the past credit history of a borrower, whether the borrower can timely repay the loan in future, is determined.

2. CapacityThis refers to how much debt a borrower can comfortably handle. The financial institution wants to know how one can repay the loan before they will approve your loan.

3. Capital Capital refers to the net worth of a borrower i.e. asset liabilities. Simply it means how much a borrower own minus how much a borrower owe.

4. CollateralCollateral is nothing but the assets of a borrower that lender can take in case borrower is unable to repay the loan.

5. Condition Lenders consider the outside circumstances that may affect the borrowers financial situation and ability to repay. If the borrower has a business, then the lender may evaluate the financial health of the borrowers industry, their local market, and competition.

If any one of these is missing in the equation then the lending officer must question the viability of credit. There is no guarantee that a loan does not run into problems; however if proper credit evaluation techniques and monitoring are implemented then naturally the probability of loan loss is minimized. This should be the main objective of every lending officer.

Principles of lending:

Banks lends the money from the fund mobilized as deposits from public. It is the responsibility of bank to ensure the safety of funds received from public. Banks looks into following aspects of lending:

Safety:

Whenever any borrower takes the loan first rule is to ensure the safety of advances made. This can be done by checking the repaying capacity of the borrower and purpose of borrowings.

Liquidity:

It is important to ensure that how and when repayment of the advances made and repayment should be timely. This is to ensure that the funds are not locked up for a long period.

Profitability:

Banks are interested in earning profits, so profitability is main concern while lending. Rate of interest should be higher than borrowing rate. It is important for bank to keep proper balance between profitability and safety of funds.

Risk diversion:

Banks should diversity there advances in terms of borrower, industry, sector etc.it should be done to mitigate the risk.

BRIEF OVERVIEW OF LOANS:

Loans can be of two types fund base & non-fund base: Fund Based

Working CapitalTerm LoanOverdraft Facility

Non-fund Based

Letter of CreditBank Guarantee

Fund Based

Working capital

The objective of running any industry is earning profits. An industry will require funds to acquire fixed assets like land, building, plant, machinery, equipments, vehicles, tools etc., & also to run the business i.e. its day-to-day operations.

Funds required for day to-day working will be to finance production & sales. For production, funds are needed for purchase of raw materials, stores, fuel, power charges etc. financing of sales by way of receivables.

Capital or funds required for an industry can therefore be bifurcated as fixed capital & working capital. Working capital in this context is the excess of current assets over current liabilities.

Term Loan A Term Loan is a loan granted for the purpose acquiring of capital assets, such as purchase of land, construction of buildings, purchase of machinery, modernization, renovation or rationalization of plant, & is repayable out of the future earning of the enterprise, in installments, as per a prearranged schedule.

A term loan may be required to finance the following purposes:

For financing acquisition of specific asset;For financing ExpansionFor financing DiversificationFor financing New Project;For financing Rehabilitation project

Term Loans can be classified as under:

Short term - where repayment period does not exceed 1 year.Medium term loan - where repayment period is over 1 year and up to 5 years.Long term loan - where repayment period exceeds 5 years.

Overdraft Facility

Overdrafts are essentially current accounts in which drawing limits have been sanctioned against security or without security. They are generally granted for short periods and are subject to review annually.

Non-fund Base

Letter of credit

The expectation of the seller of any goods or services is that he should get the payment immediately on delivery of the same. This may not materialize if the seller & the buyer are at different places (either within the same country or in different countries). The seller desires to have an assurance for payment by the purchaser. At the same time the purchaser desires that the amount should be paid only when the goods are actually received. Here arises the need of Letter of Credit (LCs). The objective of LC is to provide an assurance of payment to the seller & the delivery of goods & services to the buyer at the same time.

Bank Guarantee

A contract of guarantee is defined as a contract to perform the promise or discharge the liability of the third person in case of the default. The parties to the contract of guarantees are:

a) Applicant: Person at whose request the guarantee is executedb) Beneficiary: Person to whom the guarantee is given & who can enforce it in case of default.c) Guarantor: The person who undertakes to discharge the obligations of the applicant in case of his default

Thus, guarantee is a collateral contract, consequential to a main co applicant & the beneficiary.

COMMERCIAL REAL ESTATE

Commercial real estate is the property that is used solely for business purposes.

Commercial Real Estate typesCategoryExample

LeisureHotels, restaurants, cafes, sports facilities

RetailRetail stores,shopping malls, shops

OfficeOffice buildings, serviced offices

IndustrialIndustrial property, office/warehouses, garages, distribution centers

HealthcareMedical centers, hospitals,nursing homes

ApartmentsMultifamily housing buildings

Commercial loanis aloansecured bycommercial property, such as an office building, shopping center, hotels, industrial warehouse, or apartment complex. A commercial loan is typically used to acquire, refinance, or redevelop commercial property.

Commercial loans are structured to meet the needs of the borrower and the lender. Key terms include the loan amount, interest rate, term, amortization schedule, and prepayment flexibility.

Commercial loans are subject to extensive underwriting and due diligence prior to closing. The lender's underwriting process include a financial review of the property and the property owner, as well as commissioning and review of various third-party reports, such as anappraisal.

Generally the credits facilities are extended against the security known as primary & collateral. But even though the loans are backed by the collateral, banks are normally interested in the actual loan amount to be repaid along with the interest. For this purpose the customer's cash flows are ascertained to ensure the timely payment of principal and the interest.

Factors like age, income, number of dependents, nature of employment, continuity of employment, repayment capacity, previous loans, credit cards, etc. are taken into account while appraising the credit worthiness of a person. Every bank or lending institution has its own credit department for this purpose.

Loan Amount:

The loan amount of a commercial mortgage is generally determined based onloan to value(LTV) anddebt service coverageratios,

Interest rates:

In commercial lending risk is higher so interest rates are higher.

Fees:

Commercial mortgage lenders require a processing feewhich is typically used by the lender to cover underwriting expenses such as anappraisal (Valuation) on the property.

Term:

The term of a commercial mortgage is generally between five and ten years.

Industry AnalysisInspection of Primary and Collateral SecurityCollection of relevant documents neededApplication from the borrower at branch levelLENDING PROCESS

Company analysis by analyzing financial statements

Market Perceptionstatements

Credit Ratingstatements

Determination of Interest Rates & Installmentsstatements

Calculation of applicable chargesstatements

Concessions if any & Recommendationsstatements

Evaluate whether the proposal is within the branch limit for sanctioning, if not then send it to the respective RO/ZO/CO for sanctioningCredit facilities

1) Application from the borrower at branch level

The borrower approaches any of the branches along with the proposal which indicates how much loan is the borrower seeking for and for what purpose is the financing required. Need to come prepared with all these things for clear understanding amongst the bank and the borrower.

2) Collection of relevant documents needed

The borrower seeking or finance from Bank of Baroda needs to submit relevant documents that would be required for further credit appraisal procedure. The documents needed are 2 years audited and 2 years estimated financial statements, also CMA prepared by the company, the financial report which consists of the history, line of activity and details of shareholders and directors of the company. The borrower also needs to provide details of primary and collateral security against which the loan would be given. In case the borrower defaults to repay the loan, bank would take the charge of its primary and collateral security.

3) Inspection of Primary and Collateral Security

The primary and collateral security provided by the borrower needs to be inspected. The inspection is done by the authorized person and report is generated regarding the status and value of the securities.

4) Industry Analysis

Industry analysis is done by the bank to determine the risks involved in that particular industry. This helps the bank understand how well the industry is doing, and whether there are chances of any default on loan. If a particular industry is not doing well, then the bank will have to be cautious while giving loan to the company belonging to that particular industry.

5) Company analysis by analyzing financial statements

The analysis of the financial statements helps the bank determine how well the company is performing. Financial ratios are calculated based on the financial statements provided by the company. The ratios are checked to confirm whether they are within the prescribed norms stipulated in the loan policy of Bank of Baroda.The basic ratios that need to be screened are as follows: Current Ratio 1.33 Debt-Equity Ratio 2:1 Debt Service Coverage Ratio (Average) 1.5 Interest Coverage Ratio 2:1 Asset Coverage Ratio 1.5:1

Current Ratio should be 1.33. However, in case of borrowers having satisfactory track record and other financials, CR up to 1.17 can be accepted.

Minimum DE Ratio for a company accepted be 2:1. - In case of Consortium or Syndication financing, the bank accepts DE Ratio as accepted by all other lenders.D.S.C.R: Though ideal ratio would be 1.5, a proposal with average DSCR of 1.40 is accepted if other financials of the project are found to be satisfactory and it stands the test of sensitivity analysis with minimum average DSCR of 1.20.

6) Market Perception Market Perception is done to determine how the company will perform in future. Bank of Baroda analyses the perception of the investors through the share price of the company. This can be done by analyzing the 52 week share prices, 52 week high low share prices of the company etc if company is listed on stock exchange. Otherwise factors like level of competition, raw material availability, location, demand are taken into consideration.

7) Credit Rating

This is the crucial part of the credit appraisal as it determines the creditworthiness of the company. This also helps the bank to determine how risky or how safe it to finance the particular company is. Depending upon the credit rating done by the bank, the interest rates are determined. The higher the risk, higher is the interest rate and lower the risk, lower is the interest rate.Software used by Bank of Baroda is CRISIL Risk Assessment Model. The Credit Rating tool is developed to facilitate the credit rating of all eligible borrowable accounts. The risks grades associated with various ratings are as follows:

CREDIT RATINGRISK RATIONALE

Existing Score

AAA85-100Highest Safety

AA75-84High Safety

A70-74Adequate Safety

BBB65-69Moderate Safety

BB60-64Low safety or Risk prone

B50-59High probability of default

C35-49Very High probability of default

D0-34Highest probability of default

Credit Information Bureau (India) Ltd. - (CIBIL)

Credit Information Bureau (I) Ltd. has been set up in January 2001 and is established with the primary purpose of information sharing between Banks and Financial Institutions for curbing the un-desired growth of NPA. Banks are required to provide periodical information on suit filed accounts.Banks/FIS/SFCs are also to submit information of non-suit filed accounts to CIBIL in the prescribed format, so as to make CIBIL fully operational. The bank obtains reports from CIBIL before granting the loan to the borrower to avoid growth of NPA. It is mandatory to obtain consent letter from all the borrowers to submit information to CIBIL.

RBI Defaulters List

Reference to defaulters list/willful defaulters list/Caution list/Exporters Caution List, Specific Approval List (SAL) is made to be part of the Process Note at all levels. Defaulters List /willful Defaulters List/Caution List are being made available to the branches by way of Circulars. Exporters Caution List/Specific Approval List is being made available by circulars to controlling offices and Foreign Exchange dealing branches. Branches/Offices are required to ensure that the above lists are referred to while submitting credit proposals.

8) Determination of interest rates:

Company

InternalBase Rate %Spread %Effective Rate %

(a)(b)(a+b)

CR-110.002.5012.50

CR -210.002.7512.75

CR -310.002.7513.75

CR -410.003.2513.25

CR -510.003.7514.75

CR -610.004.2514.25

CR -7,8,9,1010.004.7514.75

9) Calculation of applicable charges:For processing of loans many charges are applicable. These charges need to be calculated by the bank and paid by the corporate. Upfront Fees Documentation Charges Prepayment Charges Processing Charges Commitment Charges

10) Concessions if any & Recommendations:In some cases concessions can be given with respect to interest rates, fees charged etc. This is decided by the sanctioning authority of the bank.After all the steps, branch puts forward its recommendations with respect to companys status, sanctioning of loan, charges applicable.

11) Evaluate whether the proposal is within the branch limit for sanctioning, if not then send it to the respective RO/ZO/CO for credit facility :The last step is to check whether the proposal is within the sanctioning power of the branch limit or not. If the amount to be sanctioned is beyond the powers of the branch level, then the proposal is sent to the Regional office of Bank of Baroda.Regional office checks all the documents and executive brief and sanctions if it is within the authority or else sends it to the Central office.

INDUSTRY ANALYSIS FOR COMMERCIAL REAL ESTATE

Commercial real estate sector is in boom in India. Poor economic growth along with high property prices have made people more skeptical about investing in real estate.Until the last few years, the year-on-year rate of growth in prices was greater than the corresponding inflation rate. Now this scenario is changing. In a best-case scenario, an investor can make money but not at a good growth rate as the values of residential properties have reached their peak. In the worst-case scenario, investors can lose money as the residential property market in many parts of the country see stagnation and declining capital values. Indian real estate market size is expected to touch US$ 180 billion by 2020. In the period FY08-20, the market size of this sector is expected to increase at a compound annual growth rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs.Sectors such as IT, retail, consulting and e-commerce have registered high demand for office space in recent times.

Other factors thatcurrently make commercial real estate investmenta safer are:

The start-up BoomIndia is seeing a steady growth in start-up business as more and more peoples realizing their entrepreneurial dreams. These entrepreneurs are managing to attract massive investments from international players as well as from leading Indian corporate. This has proved to be a major factor in increasing the demand for commercial real estate in the tier-I and tier-II cities of India.

Better ReturnThe rental yield for commercial property is usually 8-11%. If the capital value appreciation is not taken into account for residential property and only the yield is compared to commercial property, it stands much lower at 2-4%. Investing in a commercial property is a good proposition as demand for the office space in India is rising. Returns on commercial real estate are better than residential real estate and also offers higher capital appreciation.

A total of 35.6 million sq. of office space is expected to become operational in 2015. In 4Q14, 31 office projects encompassing 6.5 million sq. ft. of office space commenced operation, taking Indias total operational stock to 405.9 million sq. ft.During 2015, another 30 million sq.ft. of fresh absorption of office spaces in the country is expected. This is expected due to the robust pre-commitments in many under-construction projects in various cities and overall positivism among the office occupiers.Supply is also likely to increase in 2015 to about 35 million sq.ft. with several projects at advanced stage of construction. Maximum contribution in completions is expected from Delhi (9.3 million sq. ft.) followed by Mumbai (7.4 million sq. ft.) and Bangalore (7 million sq. ft.).Also development of SEZ in various sectors also attracts the developers, corporate.

Office space:1. Demand for office space increasing2. Backed by the strong infrastructure

Retail space:1. 25 to 30% growth is expected in retail sector

Hospitality space:1. Growth rate of this industry is around 8%

PESTLE Analysis for commercial real estate

PPoliticalDocumentation issues, permits, licenses, government strategies

EEconomicFluctuation in raw material prices which are required for construction, inflation, market demand, future growth

SSocialChanging needs, acceptance of western style infrastructure

TTechnicalIssues related to the components used in the project

LLegalIssues related to construction laws

EEnvironmentalProject location, issue related to agriculture land

Porters 5 Forces Model

Porters 5 Forces model analysis has been done to determine whether the Indian commercial real estate industry will remain profitable in future.

Threat of New Entrants

LowBargaining Power of Buyer

HighBargaining Power of Supplier

High

Threat of Substitute

Difficult to determine

Rivalry among Existing Competitor

High

Decrease profitability due to new entrants

Customer can drive down prices

Can influence business operationBanks are the main supplier

Banks have power of funding decision

Decide rate of interest

Totally new space, new location

Large no of firms

Services offered by real estate companies cannot be differentiated

CHALLENGES FACED BY BANK

1. Intense Competition

The RBI and Government of India kept banking industry open for the participants of private sector banks and foreign banks. The foreign banks were also permitted to set up shop in India either as branches or as subsidiaries. Due to this lowered entry barriers many new players have entered the market such as privatebanks,foreignbanks,non-banking finance companies,etc.Theforeignbanksand new private sector banks have spearhead the hi-tech revolution. For survival and growth in highly competitive environment banks have to follow the prompt and efficient customer service, which calls for appropriate customer centric policies and customer friendly procedures.

2. Non Performing Assets (NPA)

If borrower failed to repay the loan then the loan becomes NPA. If NPA goes on increasing then it will affect the banks profitability and image in the market. So while giving the loans bank has to take into account the creditworthiness of the bowers.

3. Risks

While giving loans banks faces various types of risks.

Credit Risk

Credit risk is the probability that a borrower will not pay back a loan in accordance with the terms of the credit agreement. In case of commercial real estate chances of credit risk is more. Banks lends money for construction of real estate and if the project is delayed due to some issue then banks fund may be locked in that project.

Macroeconomic Risk

Interest rates, inflation and exchange rate risks are amongst the important macroeconomic indicators and have shown decreased volatility. The provision of facilities, is in many regions, still inadequate. These risk factors are not likely to disappear in the near future, impeding the development of the commercial real estate sector.

Liquidity Risk

The risk can arise either because the Bank has insufficient funds to pay the amounts it owes; or even though the Bank has sufficient funds, those funds have been invested and so are not readily available. The time required for liquidity of real estate property can vary depending on the quality and location of the property.

Market Risk

Market risk arises due to change in market prices. Recession is a risk for banks and the entire economy. Bankers, along with all other business leaders, should do contingency planning for a possible downturn. Recessions most obviously bring credit quality problems to banks but also changes in the balance sheet. Loan demand weakens during a recession. Certainly commercial lending demand would decline as credit-worthy borrowers hunker down.

Property market transparency Risk

The Indian property market has low transparency when compared to the more mature and developed real estate markets. Although market transparency has improved, reliable and consistent information on the Indian property market is still not easily available.

4. Delay in obtaining construction permit for commercial real estate:

The process of obtaining construction permit has been difficult and time consuming. Because of delay in obtaining approvals and adhering to regulatory processes can raise the project cost.

5. Reserve bank norms:

Reserve Bank of India has set the threshold for the total maximum exposure to real estate including individual housing loan and lending to developers for construction finance, for Banks at 15 percent which is low.

FINDINGS

Lending to commercial real estate evolves more risk as recession hits this sector more than any other sector. So while lending to such sector appraisal process should be done properly to check the commercial, technical and financial viability of the project proposed and also properly check the primary and collateral security cover available for recovery of the loan.

Credit and risk go hand in hand. If risk is more than the rate of interest is also more. In case of commercial rate of interest risk is more so rate of interest is also more.

Risk arises due to:

Uncertainties in business environment Uncertainties in industrial environment Weakness in financial position

CONCLUSION

Credit provided by the banks is an important source of finance for the real estate. But the bank has to check the acceptability of the company before they can sanction the loan to it as lending to real estate involves more risk.

Credit appraisal is done to assess the technical, economical and financial viability of the project. Loan policy of Bank contains various norms for sanction of different types of loans for real estate and all these norms do not necessarily apply to each & every case. The credit risk assessment models adopted by the bank should take into account all possible factors which go into appraising the risk associated with a loan.

Before sanctioning a loan to the commercial real estate, in general, these following things are taken into consideration- the track record of the company, the risk profile of the company, and the ability of the company to repay the loan disbursed.

Taking these factors into consideration, the bank decides whether to sanction the loan or not. If the loan is to be sanctioned then what rate of interest is to be charged is decided based on the risk rating of the company and a host of other subjective factors.

Bank should take a pragmatic/ positive view based on all factors as prudently exposure to real estate within the RBI Cap is a high yielding venture for a Bank.

RECOMMENDATION:

Time period taken by the bank to sanction the limit should be reduced to allow the borrower to make use of the credit when required.

Time to time evaluation of debtors should be done.

Proposal has to pass through different channels due to which can be delay in disbursement of loan. This should be eliminated.

REFERENCES

Books

Internal documents of Bank of Baroda I M Pandey Financial Management Customer loan files Financial Risk management Kaplan university

Websites

www.rbi.org www.bankofbaroda.com www.Wikipedia.com www.investopidia.com

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