labels: rbi, industry - general, infrastructure - general
RBI asks banks to treat SEZs as real estatenews
21 September 2006

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.

It is no secret that the Reserve Bank of India is not particularly enthused by the idea of having a large number of SEZs all across the country. The central bank had openly stated that mushrooming of SEZs would lead to a diversion of resources from domestic tariff areas, besides revenue losses to the government.

The directive from RBI is sure to kick off another round of fight between the finance and commerce ministries over the SEZ policy. The finance ministry, which is against allowing SEZs without any limits, would most likely be accused of prompting the RBI to go hard on SEZ's.

Widespread criticism of the policy has forced the commerce ministry to initiate discussions on tightening some of the more liberal provisions of the SEZ policy. The conclave of Congress chief ministers is also expected to discuss the issue, which indicates the concerns of the political leadership of the ruling party about allegations of corruption to facilitate land grab.

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RBI asks banks to treat SEZs as real estate