MUMBAI: On Wednesday, the Reserve Bank issued final amendment directions that allow commercial banks to lend to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), while maintaining essential safeguards regarding exposure limits, asset quality, and repayment structures.
The final directions incorporate feedback from stakeholders following the draft norms.
Key changes include allowing overseas branches of Indian banks to engage in REIT financing through syndication, with specific caps on contributions (20%) and risk weight (150%).
The requirement for an insolvency mechanism has been modified to include a broader stipulation for an “effective recovery mechanism” in overseas jurisdictions.
The central bank has declined requests to finance land acquisition and under-construction assets through REIT and InvIT structures, reaffirming that indirectly financing activities not permitted directly is not allowed.
In response to industry feedback regarding eligibility criteria, the RBI has eased the three-year operational requirement by associating it with cash-flow performance. At least 80% of underlying assets must demonstrate positive cash flow for a minimum of one year.
The RBI has also withdrawn the previous proposal concerning “material adverse regulatory actions,” instead instructing lenders to evaluate these impacts during due diligence. Concerns related to financing stressed special purpose vehicles (SPVs) have been partially acknowledged, with restrictions placed on lending to SPVs already in financial distress under the RBI’s stressed asset norms.
Regarding acquisition financing, the central bank now permits REITs, alongside InvITs, to secure bank funding for acquisitions with a revised framework, excluding small finance banks from offering such facilities to InvITs.
Restrictions on bullet and balloon repayment structures remain, but repayments can now be aligned with cash flows, including step-up structures. Investments in bonds and debentures are not subject to these restrictions.
Concerning exposure norms, the total bank exposure to REITs, InvITs, and their underlying entities will still be capped at 49% of the asset value. Risk weights have been adjusted, placing REIT exposures at 100% (or 125% if classified as capital market exposure), while InvIT exposures will incur corporate lending risk weights. The RBI noted that exposures will transition to the capital charge framework effective April 1, 2027.
