Land purchase for SEZ comes under commercial realty

City ScenesThe RBI’s draft guidelines on classification of commercial real estate exposure of banks may provide some relief on loans provided for acquisition of units in special economic zones. However, RBI has not found merit in the commerce ministry’s argument to keep loans for special economic zone development outside the domain of commercial real estate coverage. It has reiterated that bank exposure for purchase of land for special economic zone and its development, will be recognized as commercial real estate, while infrastructure development will not be treated as the same.
Bankers said that more clarity will be required on the issue. The central bank’s draft guidelines have drawn upon the Basel II framework on income producing real estate and high volatility commercial real estate and the US Federal Reserve’s definition of CRE lending as income producing commercial property loans and commercial or residential developmental loans.
While it has not detailed on high volatility commercial real estate for want of documented history of real estate cycles in India, RBI has drawn upon Basel II framework’s definition of income producing real estate.
Under the framework, income producing real estate refers to a method of giving funding to real estate such as, office buildings to let, retail space, multi-family residential buildings, industrial or warehouse space, and hotels, where the prospects for repayment and recovery depend primarily on the cash flows generated by the asset. The primary source of cash flows is lease or rental payments or the sale of the asset.

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    Posted May 18, 2009 at 2:15 am | Permalink

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