The Reserve Bank of India has issued final amendment directions governing bank lending to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) on Wednesday, implementing a cash-flow based lending framework that replaces the previous three-year operational track record requirement. According to Mint, the final norms will come into effect from April 1, 2027, with banks permitted to allow existing loans to InvITs that are not in conformity with these norms to run off until maturity. The guidelines provide a clearer framework for financing the fast-growing investment vehicles while maintaining strict regulatory compliance.
Under the final amended norms, banks can lend to REITs and InvITs only if at least 80% of their underlying assets have generated positive cash flows from operations for at least one year. As reported by Mint, this represents a significant shift from the draft proposal that required three years of operational history before becoming eligible for bank finance. The central bank has also removed the proposed condition that REITs and InvITs should not have faced any material adverse regulatory action during the previous three years, instead requiring banks to assess the impact of any adverse regulatory action on creditworthiness as part of due diligence. The RBI has drawn a firm line on indirect lending, stating that "activities that cannot be undertaken directly shall also not be undertaken indirectly," with "in all cases, not less than 80% of the value of the InvIT's assets must be invested in completed and revenue-generating infrastructure projects."
The RBI has maintained strict asset composition requirements while implementing a 49% aggregate exposure cap on bank credit to a REIT and its underlying SPVs and holding companies. According to Mint, this limit is based on the previous financial year-end or latest half-yearly valuation, whichever is later, and represents a significant tightening from industry demands for alignment with SEBI rules that permit leverage of up to 70% for REITs and InvITs. For InvITs, a bank can lend to an InvIT provided not less than 80% of the value of the trust's assets is invested in completed and revenue generating infrastructure projects and such assets have been generating net positive cash flows from operations for a period of not less than one year. To contain concentration risks, the regulator has imposed a cap on bank exposure, with the aggregate exposure of all banks to a REIT or InvIT and its underlying special purpose vehicles (SPVs) and holding companies cannot exceed 49% of the value of the trust's assets. Lenders may use either the latest annual valuation or the latest half-yearly valuation of assets, whichever is more recent, for determining compliance with this limit.
The RBI has expanded commercial banking capabilities while maintaining strict risk management standards. As reported by Mint, commercial banks are now permitted to extend acquisition finance to REITs, bringing them on a par with InvITs, with a separate framework prescribed for acquisition finance extended to both REITs and InvITs. Small finance banks will not be allowed to provide acquisition finance to InvITs. The central bank has also established specific risk weighting frameworks, with exposures to REITs treated as commercial real estate exposures and attracting a risk weight of 100%, while if such exposures qualify as capital market exposures, the applicable risk weight will be 125%. Banks have been instructed to fix internal limits for aggregate exposure to the real estate sector, with the sub-limit for aggregate exposure towards REITs subject to a prudential ceiling of 10% of the bank's capital base. Overseas bank branches funding REITs constituted overseas will attract a 150% risk weight. The RBI has also clarified that repayment structures may align with cash flows, including step-up structures, but continues to restrict bullet and balloon repayment models in most cases.
The RBI has maintained strict conditions on refinancing existing credit facilities while providing clarity on acquisition finance. According to Mint, a bank has to ensure that lending to a REIT or an InvIT is not used to fund its SPVs having existing loans from regulated entities and which are facing financial difficulty. For REIT refinancing, such facilities can only be undertaken for completed projects that have received Completion Certificate (CC) or Occupancy Certificate (OC), while InvIT refinancing is limited to projects that have achieved commencement of commercial operations. The central bank has rejected industry requests for refinancing of under-construction projects, stating that "refinancing of under-construction projects is permitted only under a Syndication arrangement in terms of the extant Directions on Project Finance." Bank finance to REITs and InvITs will continue to be fully secured, with security including assignment of cash flows and receivables, pledges of equity interests in SPVs, and other legally enforceable security interests. All bank lending to REITs must be fully secured through mortgages over identified assets, assignment of rental cash flows and receivables, pledges over equity in SPVs and other enforceable security interests, with a charge over underlying immovable property being mandatory where financing is extended for acquisition, development, or refinancing of related debt.
