RBI eases norms in SEZ cases

Final guidelines on the definition of CRE exposures, necessitated due to risks involved in the real estate and Basel-II framework, were on Wednesday laid out by the RBI, after considering feedbacks on its draft guidelines.

“Banks can finance cost of land development, which will be classified as CRE for the reason that the source of repayment would be the lease rentals,” it said, adding loans for acquiring land to private developers for setting up of SEZ is not permitted.

However, the banking regulator said banks should keep in mind the substance of the transaction rather than the form. Guidelines are based on principles and comes with illustrative examples based on which banks should be able to determine. For example, it is possible that an SEZ may be developed by a single company entirely or mainly for its own use.

In such cases the repayment will depend on the cash flows generated by the economic activities of the units in the SEZ and the general cash flow of the company rather than the level of real estate prices. It should not then be classified as CRE, according to RBI  
In cases where lease rentals are insulated from volatility in the real estate prices by way of lease agreements for periods not less than that of the loan, such cases need not be treated as CRE from the time such conditions get fulfilled, the central bank said.

“These guidelines have further clarified that exposure towards acquisition of units in SEZs or purchase and working capital requirements etc would not be treated as CRE exposure and consequently would be treated as infrastructure lending,” said Export Promotion Council for EOUs and SEZs Director General L B Singhal.