New RBI Lending Guidelines for Commercial Real Estate

RBI has recently revised draft guidelines on commercial real estate (CRE) exposures and to align rules with the Basel-II framework, which defined income-producing real estate (IPRE) having a strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property. It means if the repayment primarily depends on other factors such as operating profit from business operations, quality of goods and services and tourists arrivals, the exposure would not be counted as commercial real estate.

An investment is IPRE/CRE exposure if funding results in the creation/acquisition of real estate (such as office buildings to let, retail space, multi-family residential buildings, industrial or warehouse space and hotels) where the prospects for repayment would depend primarily on the cash flows generated by the asset. The prospect of recovery in the event of default would also depend primarily on the cash flows generated from such funded asset, which is taken as security. IPRE/CRE exposure is applicable when the primary source of cash flow for repayment and recovery would have to be lease or rental payments or sale of assets.

It also proposes to address exposure arising out of infrastructure lending to special economic zones. Certain types of exposures in respect of SEZs would have the characteristics of CRE exposure. For example, an investment in the equity of a real estate company or a mutual fund/venture capital fund/private equity fund which invests in the equity of real estate companies would be sensitive to the movement in prices of real estate.