RBI proposes to allow banks to lend to REITs, widening real estate funding

Move could widen funding options for income-generating real estate assets

The Reserve Bank of India (RBI) on Friday proposed to allow banks to lend directly to Real Estate Investment Trusts (REITs) — a “landmark step” that will widen the financing options for the sector.

 

RBI Governor Sanjay Malhotra announced the proposal, which will have safeguards, in his bi-monthly monetary policy statement.

 

“Allowing banks to lend directly to REITs is a landmark step that strengthens the financial framework for the sector and supports long-term growth. Direct bank funding will give REITs access to more stable, long-tenor capital and help improve financing efficiency,” the Indian REITs Association said in a statement.

 

 

Investing in REITs

 

REITs are market-listed investment vehicles that own and operate income-producing real estate such as office spaces, malls and commercial complexes. They allow retail and institutional investors to earn rental income without directly buying property.

 

REITs and Infrastructure Investment Trusts (InvITs) were originally designed to:

 

• Release bank capital locked in completed projects
• Refinance operational real estate and infrastructure assets
• Attract pooled funds from institutional and retail investors

 

Banks were barred from lending to REITs but they could lend  to InvITs. The RBI said on Friday the framework has been reviewed given the stronger regulatory and governance structure of listed REITs.

 

What the RBI has proposed

 

According to PTI, the central bank plans to:

• Allow commercial banks to extend loans to REITs
• Apply prudential safeguards similar to those used for InvIT lending
• Harmonise existing InvIT lending rules with the proposed REIT norms
• Issue draft directions shortly for public consultation

 

India has five listed REITs: Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT, Nexus Select Trust, and Knowledge Realty Trust.

 

For investors, wider bank funding access could improve liquidity at the asset level and potentially support future acquisitions and refinancing by REITs, though final impact will depend on the detailed rules.

 

Budget push and bond market reforms

The development follows the Union Budget announcement proposing faster “recycling” of Central Public Sector Enterprise real estate assets through dedicated REIT structures.

 

Separately, the RBI also outlined steps to deepen the corporate bond market. It plans to introduce:

 

• Derivatives on corporate bond indices
• Total return swaps on corporate bonds
• These tools aim to improve credit risk management and liquidity across the bond market.
• Forex and debt investment changes

 

Other proposals flagged by the RBI, as reported by PTI, include:

 

Revised and more flexible foreign exchange rules for authorised dealer banks and standalone primary dealers

 

Removal of the Rs 2.5 trillion cap under the Voluntary Retention Route for foreign portfolio investors, subject to category-wise limits.

 

Draft frameworks for these measures will also be released for stakeholder feedback.