No finance sops to SEZ developers

NEW DELHI: The Reserve Bank of India is taking no chances with SEZs. Treating SEZs on par with real estate projects, it has ruled out any concessional finance to developers and units in the zones.

“Like any other land, SEZ is real estate,” RBI governor YV Reddy told reporters on the sidelines of a seminar. The governor’s comments came in the context of the central bank’s notification issued on Wednesday, that directed all scheduled banks to offer credit to SEZs on same terms and conditions as offered to real estate developers. The RBI guidelines are expected to make the funding for SEZs costlier. The Centre is currently finalising a large number of investment proposals for setting up SEZs.

The RBI notification said, “Keeping in view the current market conditions, it has been decided that the exposure of banks to entities for setting up SEZs or for acquisition of units in SEZs, which includes real estate, would be treated as exposure to commercial real estate sector with immediate effect.”

While lending to infrastructure projects carries a risk weight of 100%, those to real estate projects has a risk weight of 150%. This means that lending to SEZs would not only be costlier, but banks would also have lower funds to provide lending to SEZ developers and units.

The RBI views are in sync with the finance ministry concerns on the plethora of SEZ approvals. It has said this would lead to a massive revenue loss to the exchequer, from the tax sops given to 150 SEZs already cleared and a couple of hundred others, pending. On interest rates, Mr Reddy said there was no one-to-one link between interest rates in the United States and India. Speaking to reporters, a day after the Federal Reserve left rates unchanged, he said, “We are monitoring these developments.”

The key reverse-repo rate is at 6%, having been raised three times this year to fight inflation pressures. The governor said he would stick by the central bank’s inflation estimate at 5.0-5.5% for ’06-07 and said unless global crude oil prices fell on a sustained basis, inflation worries would continue to cast a cloud over the otherwise buoyant GDP growth estimates.

“We are most concerned about the inflationary expectations. Unless there is a convincing reason that oil prices are easing off on a sustained basis, the inflationary expectations will not be significantly altered. We keep observing how things pan out, but at the moment this by itself is not a cause for revising the inflation estimate, Mr Reddy said.

Mr Reddy said liquidity in the banking system was comfortable and he expected the government’s borrowing plan for the fiscal year to March ’07 to go through smoothly. The central bank was also keeping its forecast that the economy would grow 7.5-8% for the year to March ’07.

Industrial output in July grew 12.4% from a year earlier, the fastest pace in a decade. “High industrial growth is a good news and it showed growing business confidence,” he said.Meanwhile, the central bank is exploring the possibility to set up a Depositor Education Fund, which can be utilised towards greater awareness for financial education and awareness.