SEZ land purchase is commercial realty: RBI
The Reserve Bank of India’s draft guidelines on classification of commercial real estate exposure of banks may provide some relief on loans provided for acquisition of units in special economic zones.
On other counts, however, RBI has not found merit in the commerce ministry’s argument to keep loans for SEZ development outside the ambit of commercial real estate (CRE) exposure. It has reiterated that bank exposure for purchase of land for an SEZ and its development, will be classified as commercial real estate, while infrastructure development will not be treated in the same manner.
Bankers, however, said more clarity will be required on the issue.
The central bank’s draft guidelines issued this evening have drawn upon the Basel II framework on income producing real estate (IPRE) and high volatility commercial real estate and the US Federal Reserve’s definition of CRE lending as income producing commercial property loans and commercial or residential developmental loans.
While it has not elaborated on high volatility commercial real estate for want of documented history of real estate cycles in India, RBI has drawn upon Basel II framework’s definition of IPRE.
Under the framework, IPRE refers to a method of providing funding to real estate such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels, where the prospects for repayment and recovery depend primarily on the cash flows generated by the asset. The primary source of cash flows is lease or rental payments or the sale of the asset. The definition will hold even if the borrower is not a real estate player. “The distinguishing characteristic of IPRE versus other corporate exposures that are collateralised by real estate is the strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property,” the draft guidelines said.
So, if either the repayment or the recovery does not depend upon the real estate, the exposure need not be defined as IPRE or CRE. However, in cases where the exposure is unsecured and the source of repayment is sensitive to change in real estate prices, the exposures would be classified as CRE exposure, RBI said.
| HOW WILL BANKS DEAL WITH OTHER LOANS |
| COMMERCIAL REALTY |
| * Loans to builders for construction of houses, hotels, hospitals, malls, office blocks for sale/ lease Why: Repayment depends on cash flows from the sale or lease rentals |
| * Loans against security of rent receivables generated by CRE exposure Why: Repayment, recovery depends on realty prices |
| * Loans for multiple houses intended to be rented out. Banks to treat such loans as realty exposure if the borrower is in the business of renting houses and if the number of such units is more than two |
| NON-CRE EXPOSURE |
| * Loans for construction of hotels, hospitals by developers who themselves run ventures Why: Repayment through cash flows generated by services rendered |
| * Loans against the security of factory land & building for purchase of the plant & machinery, raw material Why: Repayment via cash flows of unit from sale of the material. Realty prices will not affect repayment |
| * Loans for purchasing plant and machinery with land and building as collateral Why: Repayment depends on unit’s operating profit |
Using this definition, RBI has said that in case of an SEZ, exposure towards purchase of land and its development will depend on the sale proceeds or rentals from the plots and leased units. “The cost of plots would include the cost of land acquisition as well as the cost of land development. As both the repayment and recovery of loan depend on the same source of cash flow… these exposures would be classified as CRE exposures,” it said.
In case bank exposure towards acquisition of units in SEZs, which is so far included in the CRE definition, RBI said, there is unlikely to be speculative activity in the sale and resale of these units due to the need for prior government approval. “Therefore, such cases are more like financing of industrial units or the projects,” the draft said.
The exposure to industrial units towards purchase of plant and machinery, and working capital requirement will continue to be outside the ambit of the CRE definition as well as loans for development, operations and maintenance of roads, ports and airports as also water supply, power and telecom networks.