Hotel, hospital loans may not come under commercial real estate exposure

Hotel, hospital loans may not come under commercial real estate exposure
The Hindu Business Line, July 9, 2009, Page 6

Internal cap on lending could be relaxed for such projects.

Our Bureau, Mumbai

Commercial banks may have more flexibility to lend to hotel and hospital projects. The RBI, in its draft guidelines on commercial real estate (CRE) exposure, has said that loans for construction of hotels and hospitals will not be classified as CRE exposure.

According to bankers, the internal cap on lending could be relaxed if projects do not carry the CRE tag.

The RBI, however, is silent on how banks should classify their exposure to information technology parks.

Loans extended for construction, among others, of a cinema theatre, amusement park, hotels and hospitals, and educational institutions to entrepreneurs who themselves run these ventures would not be classified as CRE.

Loans to entrepreneurs for acquiring real estate for the purpose of carrying on business activities, which would be serviced out of cash flows generated by those business activities, may not be classified as CRE, the RBI said in its draft guidelines.

Loans which will not be classified as CRE include those extended to a company (engaged in a mixed activities including real estate) for a specific purpose, not linked to real estate activity; exposure towards acquisition of units in special economic zones; and exposures to industrial units set up in SEZs.

According to the RBI, among others, loans to builders; exposure to mutual funds/ venture capital funds/ private equity funds investing in real estate companies; loans extended against the security of future rent receivables generated by CRE exposure; exposure towards purchase of land for developing SEZs, loans for integrated townships etc will be classified as CRE.

The Reserve Bank of India said commercial banks should classify an exposure as income producing real estate (IPRE)/ commercial real estate (CRE) exposure if the funding leads to the creation/ acquisition of real estate where the prospects for repayment would depend primarily on the cash flows generated by the asset.

The draft guidelines on CRE have been issued in order to align RBI’s definition of CRE with that of Basel II.

The prospect of recovery in the event of default, according to the revised draft guidelines, would also depend primarily on the cash flows generated from such funded asset which is taken as security.