RBI to allow bank funding to REITs

Mumbai: Reserve Bank of India (RBI) will change its rules and permit banks to lend to Real Estate Investment Trusts (REITs) signalling the central bank’s continued intent to ease regulations.

“Upon review and considering the presence of strong regulatory and governance framework for listed REITs, it is proposed to permit commercial banks to extend finance to REITs, subject to appropriate prudential safeguards,” governor said in his post policy statement adding that draft directions in this regard will be issued shortly for public consultation.

REITs are SEBI-regulated, listed entities that pool investor money to provide regular income (min. 90% distribution) through passive ownership. REITs focus on income-generating commercial real estate (offices, malls). The opening of lending to REITs is a change in the central bank’s thinking which always insulated banks from lending to real estate sector which is considered risky.


The potential lending to the REITS opens up a new funding source for the real estate sector. Bankers said how the RBI designs the draft norms will be important to watch out. “Clearly there is some push about lending to real estate which could be because some specific requests would have come to the central bank. At a time when private funds for the sector are hard to come by, this is an important move. More so because interest rates to REITs could be much lower at 7% to 8% compared to the 10% to 12% rates for real estate sector currently,” said a senior banking official.

REITs were conceptualised in India with a view to free up banks’ funds in completed and operational real estate and infrastructure projects by refinancing such exposures with pooled funds of institutional as well as retail investors. Now allowing banks to fund these does against the objectives.

To be sure, banks are already permitted to lend to InvITs (Infrastructure Investment Trusts) which hold assets like roads, highways, and transmission lines which generate revenue from tolls, usage charges, and long-term government or corporate contracts and are considered to have a higher project-based risks associated with traffic or usage demand.

Earlier this week, the union budget proposed to accelerate the recycling of significant real estate assets of Central Public Sector Enterprises (CPSEs) through the setting up of dedicated REITs.

“The real estate sector is also a critical sector in terms of actuating overall economic activity and job creation. Perhaps, the RBI has sensed that this sector is in need of incremental funding at this juncture and taken this step with regard to REITs,” said Shivaji Thapliyal, banking analyst at Yes Securities.