RBI allows banks to lend to REITs; bars land acquisition financing | Banking
The Reserve Bank of India has proposed allowing banks to lend to real estate investment trusts (Reits). However, it recommended that all banks’ total credit exposure to a borrowing REIT and its underlying special purpose vehicles (SPVs) or holding companies be capped at 49 per cent of the value of the Reit’s assets as at March 31 of the previous financial year.
Banks will be required to strictly monitor the final use of funds to ensure that loans to Reits are not used to finance prohibited activities, including land acquisition, even if such acquisition is part of a project.
In the draft regulations released on Friday, the RBI said banks can lend only to REITs registered and regulated by the Securities and Exchange Board of India. Overseas branches of Indian banks may also extend loans to overseas REITs, provided that an effective legal or regulatory insolvency or insolvency framework exists in the relevant jurisdiction.
The proposed guidelines are scheduled to come into force from July 1.
Banks will be allowed to lend only to REITs that meet certain eligibility criteria, including being listed on the stock exchange, having completed at least three years of operations with positive net distributable cash flow in the previous two financial years, and not having been subject to any significant adverse regulatory action in the last three years.
The RBI said that where bank financing is intended for refinancing of existing term loans of SPVs, such loans will be allowed only for completed projects receiving completion certificate (CC), occupancy certificate (OC) or equivalent approval. Additionally, loans to REITs must be structured as amortization-only loans, with no single or balloon principal repayments.
The draft norms also stipulate that bank financing for Reits must be fully secured by mortgages on designated assets. Financing for a particular property across all banks should be extended at either the REIT level or the SPV/holding company level, but not both. Where the loan is made at the REIT level, any existing loan against the same property at the SPV or holding company level must be fully liquidated.
Additionally, banks will need to establish a charge on their receivables from underlying properties and/or put in place an escrow mechanism to prevent diversion of cash flows.
