RBI Allows Banks to Lend to REITs and InvITs with Revised Norms; Caps Exposure at 49%
The Reserve Bank of India (RBI) has issued final amendment directions allowing commercial banks to lend to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), while retaining key prudential safeguards on exposure limits, asset quality, and repayment structures. These final directions were issued after incorporating feedback from stakeholders on the draft norms.
Among the major changes, the RBI has permitted overseas branches of Indian banks to participate in REIT financing under syndication arrangements, subject to a 20% cap on contribution and a 150% risk weight. The requirement for an insolvency mechanism has been replaced with a broader “effective recovery mechanism” condition in overseas jurisdictions.
The central bank has, however, rejected requests to allow financing of land acquisition and under-construction assets through REIT and InvIT structures, reiterating that activities not permitted directly cannot be financed indirectly. Responding to industry feedback on eligibility norms, the RBI relaxed the earlier three-year operational requirement by linking it to the cash-flow performance of underlying assets. It mandated that at least 80% of underlying assets must generate positive cash flows for at least one year.
The RBI also removed the earlier proposal on “material adverse regulatory action,” instead directing lenders to assess such impacts through due diligence. Concerns regarding exposure to stressed special purpose vehicles (SPVs) were partially accepted, with restrictions placed on financing SPVs already facing financial difficulty under the RBI’s stressed asset norms.
On acquisition finance, the central bank permitted REITs, in addition to InvITs, to access bank funding for acquisitions under a revised framework, while barring small finance banks from extending such facilities to InvITs. The RBI retained restrictions on bullet and balloon repayment structures, though clarified that repayments can align with cash flows, including step-up structures, and excluded bond and debenture investments from the restriction.
On exposure norms, aggregate bank exposure to REITs and InvITs and their underlying entities will remain capped at 49% of asset value. Risk weights have also been revised, with REIT exposures set at 100% (or 125% if classified as capital market exposure), while InvIT exposures will attract corporate lending risk weights. The RBI stated that exposures will ultimately shift to the capital charge framework effective April 1, 2027.
These changes aim to enhance the liquidity and financial stability of REITs and InvITs, while ensuring that banks maintain prudent risk management practices. The RBI’s approach balances the need for regulatory safeguards with the flexibility required to support the growth of these investment vehicles in the Indian market.
