Revised Guidelines on Commercial Real Estate Exposure
The Reserve Bank of India (RBI) has recently issued revised guidelines pertaining to banks' exposure to commercial real estate. These guidelines aim to clarify the conditions under which loans to commercial real estate are treated as exposure.
Key Conditions for Exposure Classification
- Property-Dependent Repayment: If the repayment of a loan primarily relies on the property itself, rather than on the expected profits from the business or project, it is considered exposure to commercial real estate.
- Profit-Dependent Repayment: Conversely, if the loan repayment mainly depends on other factors such as:
- Operating profit from business operations
- Quality of goods and services
- Tourist arrivals, etc. then the exposure is not classified as commercial real estate.
Guidelines for Bank Financing
- Public Agencies and Land Development: Banks may provide funding to public agencies for the acquisition and development of land, but only as part of a comprehensive project.
- Private Builders and Public Agencies: Banks can offer credit to private builders on commercial terms through project-specific loans, provided the land is obtained and developed by state housing boards or other public agencies.
- Restrictions on Land Purchase Financing for Private Builders: Banks are not permitted to extend facilities to private builders solely for the purchase of land, even if it's part of a housing project.
Financing for Individual Plot Purchases
- Condition for Loan Approval: Banks can approve financing for individuals to purchase plots, subject to a declaration from the borrower stating their intention to construct a house on the purchased plot.