Bank financing only to listed REITs with a clean record, says RBI

Mumbai: Banks can only lend to Real Estate Investment Trusts (REITs) which are listed, completed three years of operations and without any adverse regulatory action in the last three years, Reserve Bank of India (RBI) said in its draft guidelines put up for public comments on Friday.

Where bank financing is for the purpose of refinancing of existing term loans, it shall be ensured that the financing is only for completed projects that have received a completion certificate (CC), occupation certificate (OC). Further lending to a REIT by a bank shall only be by way of loans not involving bullet or ballooning principal repayments, the RBI said.

The draft guidelines have been issued following the post policy monetary policy announcement allowing banks to lend to REITS. The guidelines are open for public comments till March 6 and are likely to be implemented from July 1.

Banks have to assess all critical parameters including sufficiency of cash flows to ensure timely debt servicing subject to a ceiling of exposure to a single REIT.

“The aggregate credit exposure of all banks to the borrowing REIT and its underlying SPVs/ holdcos taken together, shall not exceed 49% of the value of the REIT’s assets as on March 31st of the previous financial year,” the guidelines said. A lower limit as may be decided by the bank’s board based on the credit rating of the REIT.

Bank finance to REITs has to be fully secured by way of mortgage of identified assets. Further, financing against a specified property across all banks shall be extended either at the REIT level or at the SPV/holdco level, but not at both levels.

“Where a facility is extended at the REIT level against a specified property, any existing loan at the SPV or holding company level in respect of such property shall be fully liquidated,” RBI said.Banks will also have to create a charge over receivables from the underlying properties and establish an escrow mechanism to prevent diversion of cash flows.

Borrowing REITS have to have a positive ‘net distributable cash flows’ in the preceding two financial years.

None of the underlying SPVs under the REIT must be facing ‘financial difficulty’ as defined by the RBI’s stressed asset resolution directions 2025.

Overseas branches can also lend to REITs from abroad provided an effective insolvency mechanism, either statutory or regulatory, is available in the relevant jurisdiction.

Banks have to strictly monitor the end use of funds lent to REITs to ensure they are not used to finance activities which are not permitted, such as land acquisition, even where such acquisition forms part of a project.