The Reserve Bank of India (RBI) on Friday issued the draft guidelines for banks lending to Real Estate Investment Trusts (REITs), as announced in the February monetary policy review. As per the draft, aggregate exposure of a bank towards REITs must not exceed 10% of a lending bank’s eligible capital base.
“This is part of RBI’s broader prudential framework. By capping exposure at 10% and requiring banks to set internal limits for real estate, the RBI aims to ensure lending remains prudent,” said Vishal Srivastava, Managing Director, Anarock Capital.
RBI proposes 49% cap on banks’ REIT exposure
The draft further states that the combined credit exposure of all banks to a REIT, including its underlying special purpose vehicles (SPVs) and holding companies, must not exceed 49% of the REIT’s value as of March 31 of the previous financial year, or a lower threshold as determined by the bank’s board. The central bank has sought stakeholder feedback by March 6.
According to the draft norms, banks must frame a board-approved policy for lending to this segment. They may lend only to REITs that are listed, registered with the Securities and Exchange Board of India (Sebi), and have completed at least three years of operations, with no regulatory action against them.
For refinancing of existing term loans of SPVs, banks must ensure the project is completed and has received the necessary completion or occupancy certificates. Loans must be structured to avoid bullet or balloon repayments, the RBI added.
Bank financing to REITs must be fully secured through a mortgage of identified assets. Lenders are required to assess the sufficiency of cash flows at the REIT level to ensure timely debt servicing.
End-use checks tightened; escrow mechanism to prevent diversion
Banks must also strictly monitor the end use of funds to ensure this route is not used for prohibited activities such as land acquisition, even if part of a larger project. They must create a charge over receivables from underlying properties or set up an escrow mechanism to prevent diversion of cash flows.
“While more capital will flow into REITs, banks are also likely to explore commercial real estate loans that offer higher yields than lease rental discounting, which carries relatively lower returns,” Srivastava added.
The RBI also plans to harmonise existing lending norms for infrastructure investment trusts, currently applicable to commercial banks, small finance banks, and All India Financial Institutions, with the new prudential safeguards proposed for REITs, given their similar structures and risk profiles. The final guidelines will come into effect from July 1.