India Real Estate Monitor

The Reserve Bank of India instructed banks to meticulously assess the inherent group risk on borrowal accounts coming under the real estate category.
This caution comes in the wake of the RBI’s findings that some of the companies operating in the sector have significant exposure in the form of advances, investments etc., to their subsidiaries and other group or related entities.
Further, while assessing the loan requirements of large builders/land developers, banks should carefully analyze the financial credentials/viability of the borrowers on a consolidated basis supported by the consolidated accounts/position of the group, the central bank said in a notification.
Banks should also examine the financial credentials/viability of the relevant unconsolidated related entities such as SPVs. The current practice in the real estate sector is that builders/developers hive off each project as a special purpose vehicle so that projects are ring-fenced from each other.
According to Mr B.K. Batra, Executive Director, IDBI Bank, when considering loan proposals from the real estate sector, banks would do well to gather comprehensive information about a builder and the associate companies and SPVs floated by him so that right credit decision can be taken and exposure ceilings to individual or group borrowers are not breached. Banks are required to frame comprehensive prudential norms relating to the ceiling on the total amount of real estate loans, single or group exposure limits for such loans, margins, security, repayment schedule and availability of supplementary finance and the policy should be approved by the boards.