RBI asks banks to treat SEZs as real estate

When critics of the special economic zones (SEZ) policy argued that promoters of SEZs are only interested in developing residential townships, they never imagined that the RBI would also agree with their views. Through its latest clarification to domestic commercial banks the central bank has done just that.

The RBI has clarified to commercial banks that all loans to SEZ developers and for acquiring units in SEZ should be considered as exposure to commercial real estate. In other words, such loans would not be treated as industrial advances and hence the interest costs would be much higher. Till now, banks were inclined to treat SEZ projects as infrastructure projects in the absence of any specific directive from the central bank.

Banks are generally very conservative when it comes to exposure to commercial real estate, mostly because of the fluctuations in market prices. Margin requirements and interest rates on such loans are generally much higher than industrial loans.

In view of the substantial increase in real estate prices, the RBI had increased the risk weight for the real estate sector earlier this year. Higher risk weight invites higher provisioning requirements.

The RBI requires commercial banks to make higher standard provisions for their exposure to the real estate sector. Standard provisioning is done for all advances, irrespective of whether they are good or bad. Such provisioning for real estate exposure is 1 per cent as compared to 0.4 per cent of advances to other priority sectors.