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). It, however, 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 on March 31 of the previous financial year.
Banks will be required to strictly monitor the end use of funds to ensure that loans to Reits are not used to finance prohibited activities, including the acquisition of land, even when such acquisition is part of a project.
In a draft regulation released on Friday, the RBI said banks can only lend to Reits registered and regulated by the Securities and Exchange Board of India. Overseas branches of Indian banks may also extend credit to overseas Reits, provided that an effective legal or regulatory framework for insolvency or bankruptcy exists in the relevant jurisdiction.
The proposed guidance is expected to come into force from July 1.
Banks will be allowed to lend only to Reits that meet specified eligibility criteria, including being listed, having completed at least three years of operation with positive net distributable cash flows in the previous two financial years and not having been subject to any significant adverse regulatory action in the last three years.
Where bank financing is for refinancing existing term loans of SPVs, such loans will be permitted only for completed projects which have received a completion certificate (CC), occupancy certificate (OC) or equivalent approval, the RBI said. In addition, loans to Reits must be structured only as amortizing loans, with no bullet or lump sum principal repayment.
The draft standards also stipulate that Reits’ bank financing must be fully secured by a mortgage on identified assets. Financing for specified real estate in all banks should be extended either at the REIT level or at the SPV/holding company level, but not both. Where the loan is provided at the Reit level, any existing loan at the SPV or holding company level on the same property must be fully liquidated.
Additionally, banks will be required to create a charge on the claims on the underlying properties and/or put in place an escrow mechanism to prevent misappropriation of cash flows.
