The government is closely monitoring investments flowing into the real estate sector to see

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if any asset price bubble is building up, particularly in urban centres where real estate prices have shot up after having been subdued for many months last year.

“We are scrutinising all types of fund flows into the sector but no decision has been taken on whether to curb them or not,” R Gopalan, secretary in the financial service department of the finance ministry, told Financial Chronicle.

The Reserve Bank of India (RBI) has been cautioning banks against lending to the sector and asked them to continuously monitor the money going in. On their part, banks have curtailed lending to real estate companies.

The total outstanding of banks to the real estate sector stood at Rs 88,581 crore as on November 21, 2009. The banks exposure to the real estate sector has gone down by a little over Rs 8,000 crore between June and November 2009.

In a speech last week RBI deputy governor Usha Thorat had said that banks were expected to monitor their exposure to commercial real estate so as to limit the risk of a downturn in the sector.

“Although no regulatory limit is specified in this regard, RBI keeps a close watch on each bank’s exposure to commercial real estate through offsite surveillance and initiates corrective actions where necessary.”

Recognising that risk concentrations could lead to problems for banks, RBI had advised them way back in 1989 to fix internal, board-approved limits on their exposures to specific industries and sectors and also prescribed prudential regulatory limits on exposures to single and group borrowers. Following this, all banks have internal limits on exposures to sensitive sectors like real estate and the capital market.

The worry for the government and RBI is that excessive fund flows into the sector could lead to unrealistic and unsustainable prices. Commercial space development is already in a spot, as supply has outstripped demand. Developers have begun to either default or defer loan repayments even after their debt has been restructured.