Banks Will Be Permitted to Lend Only to Listed REITs

Mumbai: The Reserve Bank of India (RBI) on Friday issued draft guidelines to allow banks to lend directly to Real Estate Investment Trusts (REITs), as announced by RBI governor Sanjay Malhotra during the Monetary Policy last week. The draft norms propose to cap the aggregate credit exposure of all banks to a borrowing REIT and its underlying SPVs or holding companies at 49 per cent of the value of the REIT’s assets as of March 31 of the preceding financial year.

Banks will provide loans to only listed REITs, complete a minimum of three years of operations, and have not been subject to any material adverse regulatory action during the previous three years, said the RBI. At present, there are five listed REITs in India - Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT, Nexus Select Trust, and Knowledge Realty Trust.

Banks will be required to strictly monitor the end use of funds to ensure that lending to REITs is not used to finance prohibited activities, including land acquisition, even where such acquisition forms part of a project.

A REIT is an entity that owns and manages income-generating real estate assets such as malls and offices. These entities pool money from investors to invest in properties and distribute the income as dividends.

The central bank said that banks may lend only to SEBI-registered and regulated REITs. Overseas branches of Indian banks may also extend credit to overseas REITs, provided an effective statutory or regulatory insolvency or bankruptcy framework exists in the relevant jurisdiction.

Direct access to bank lending provides REITs with a stable, long-term source of funding, expanding the avenues of fund raising for these instruments. This is particularly important for an asset class built on long-duration, income-generating real estate.

The ability to borrow at the REIT level is also expected to result in more efficient financing costs. REITs today raise debt funds through issuance of debt securities which are subscribed by mutual funds, NBFCs, etc. Since these investors prefer instruments with 3-5 years tenor, long term funding remains a challenge. With RBI allowing banks to lend to REITs, these vehicles will be able to access long term funding said The Indian REITs Association.

In another circular, the central bank issued final norms on capital market exposure allowing banks to finance acquisitions up to 20 per cent of their eligible capital base following a ‌review of ⁠bank exposure to capital markets. This opens a new avenue of credit growth for them. ⁠Banks will be permitted to lend up to 75 per cent of the acquisition value. Acquisition finance will be permitted for the purchase of both listed and unlisted companies. The acquisition of stake can be via common equity shares or compulsorily convertible debentures (CCDs) or both, the rules said. Till now banks were not permitted to fund acquisitions.