RBI allows banks to lend to REITs; bars land acquisition financing

Draft norms cap bank exposure to 49% of REIT asset value and prohibit funding for land acquisition, even if part of a project

The Reserve Bank of India has proposed to allow banks to lend to real estate investment trusts (Reits). It, however, has recommended capping the aggregate credit exposure of all banks to a borrowing Reit and its underlying special purpose vehicles (SPVs) or holding companies at 49 per cent of the value of the Reit’s assets as of March 31 of the preceding financial year.

 

Banks will be required to strictly monitor the end-use of funds to ensure that lending to Reits is not used to finance prohibited activities, including land acquisition, even when such acquisition forms part of a project.

 

In draft regulations released on Friday, the RBI said banks may lend only to Reits that are registered and regulated by Securities and Exchange Board of India. Overseas branches of Indian banks may also extend credit to overseas Reits, provided an effective statutory or regulatory insolvency or bankruptcy framework exists in the relevant jurisdiction.

 

The proposed directions are slated to come into force from July 1.

 

Banks will be permitted to lend only to Reits that meet specified eligibility criteria, including being listed, having completed at least three years of operations with positive net distributable cash flows in the preceding two financial years, and not having been subject to any material adverse regulatory action in the past three years.

 

Where bank financing is intended for the refinancing of existing term loans of SPVs, such lending will be allowed only for completed projects that have received a completion certificate (CC), occupancy certificate (OC), or an equivalent approval, the RBI said. Further, lending to Reits must be structured solely as amortising loans, with no bullet or balloon principal repayments.

 

The draft norms also stipulate that bank finance to Reits must be fully secured by a mortgage of identified assets. Financing against a specified property across all banks must be extended either at the Reit level or at the SPV/holding company level, but not both. Where lending is extended at the Reit level, any existing loan at the SPV or holding company level against the same property must be fully liquidated.

 

In addition, banks will be required to create a charge over receivables from the underlying properties and/or put in place an escrow mechanism to prevent the diversion of cash flows.