Mumbai: The Reserve Bank on Wednesday relaxed norms
for bank financing to Special Economic Zones, which will be
treated as infrastructure projects if they are insulated from
the volatility of real estate prices.
In a notification, the RBI asked the banks that they
"should keep in mind the substance of the transaction rather
than the form," when deciding if the loans to SEZs should be
considered as exposure to commercial real estate (CRE) or
infrastructure.
It said if the repayment is not dependent on the
fluctuating rentals of the property, it should not be
classified as CRE exposure.
Citing an example, it said if an SEZ is developed by a
single company mainly for its own use, "the repayment will
depend on the cash flows generated by the economic activities
in the SEZ and the general cash flow of the company."
The treatment of loans to SEZ as CRE or infrastructure
makes a difference in the interest rate to the borrowers,
since the lenders have to provide for higher provisions
against defaults in real estate business.
The SEZ developers have welcomed the relaxation in
funding norms.
"This would enable domestic institutions and banks to
make funds available to SEZ sector on the terms which are
applicable to infrastructure lending ... This is in keeping
with the spirit of the SEZ Act," Director General of the
Export Promotion Council for EOUs and SEZs L B Singhal said.
In cases where rentals are insulated from volatility in
the real estate prices by way of lease agreements for periods
not less than that of the loan tenor and no clause which
allows downward adjustment in the lease rentals, such cases
need not be treated as CRE, the RBI said.
"These guidelines have further clarified that exposure
towards acquisition of units in SEZs or purchase and working
capital requirements etc. would not be treated as CRE exposure
and consequently would be treated as infrastructure lending,"
Singhal said.
The RBI laid down the final guidelines on the definition
of CRE exposures, necessitated due to risks involved in the
real estate sector and compliance to Basel-II framework, after
considering feedbacks on its draft guidelines.
According to the approach followed by the RBI in defining
CRE exposure for the banks, it would be CRE loan if loan
repayment is dependent on the cash flows generated by sale or
lease rentals of property like hotels and hospitals.
But in case loan repayment is to be serviced out of the
cash flows generated by business activities by entrepreneurs
who themselves run ventures like hotels and hospitals, the
exposure would not be considered as CRE.
"In the case of a hotel, the cash flows would be mainly
sensitive to the factors influencing the flow of tourism, not
directly to the fluctuations in the real estate prices," the
RBI stated.
Bureau Report
First Published: Wednesday, September 09, 2009, 21:26