The Reserve Bank of India has redefined the terms of bank lending norms for the development of special economic zones. “Banks should keep in mind the substance of the transaction rather than the form. For example, it is possible that an SEZ may be developed by a single company entirely or mainly for its own use. In such cases the repayment will depend on the cash flows generated by the economic activities of the units in the SEZ and the general cash flow of the company rather than the level of real estate prices. It should not then be classified as commercial real estate,” the RBI said in its draft guidelines on commercial real estate exposures.

Banks have to keep more capital aside while lending to commercial real estates (CRE), which make such loans costlier. Similarly, there can be co-developers in an SEZ who undertake a specific job such as provision of sewerage, electrical lines etc. “If their repayment is not dependent on the cash flows generated by the CRE asset, such exposures would not be classified as CRE,” the RBI said. However, exposures towards purchase of land will be treated as CRE exposure as it will be repaid from the sale proceeds/ rental of the plots given on lease to the units in the SEZs.

“As the repayment and recovery of loan, even if it is not mortgaged, would depend on the cash flow from sale price/ rentals, these exposures would be classified as CRE exposures,” the RBI said. “The exposure towards meeting the cost of development will be classified as CRE for the reason that the source of repayment would be the rentals or sale proceeds of the developed plots. Since these would be generally secured by the land and the developed structure the recovery would be sensitive to the movement in real estate prices,” it said.