Friday, September 22, 2006

RBI’s bad news for SEZs: Bank loans could now be dearer

MUMBAI, NEW DELHI, SEPT 20: The Reserve Bank of India has dealt a body blow to Corporate India’s rush for setting up special economic zones by treating lending to SEZs or acquisition of units in SEZs as exposure to commercial real estate. This will not only raise the cost of funds for SEZ developers, but also reduce the availability of funds. Given the sharp rise in credit to the real estate sector, the RBI had in April increased the general provisioning requirement on standard advances to 1% from 0.4% and also hiked the risk weightage to such exposures to 150% from 125%. Many banks and housing finance institutions increased lending rates after the move. The banking regulator’s latest decision, in one way, also reflects the simmering discontent within the government. The finance ministry and the Planning Commission have been opposing SEZs — tooth and nail — because of the estimated revenue loss of a whopping Rs 1.70 lakh crore. The commerce ministry, on the other hand, expects investments in SEZs to top Rs 1 lakh crore by December next and create employment opportunities for over 5 lakh. The apex bank had in its annual report for 2005-06 too said the growth of SEZs led to uneven development of regions within the country. It felt the tax breaks could be justified only if the units in SEZs established backward and forward linkages with the domestic economy. Bankers said it was a clear signal by the RBI to ensure banks did their homework well before lending to SEZ projects. At present, SEZs are accorded priority status and are categorized as infrastructure projects. Accordingly, they carry a risk weightage of only 100%. A higher provisioning would force banks to allocate more capital towards advances to SEZs, which eventually may compel them to hike the lending rates. No easy money • Since banks have a ceiling on real estate exposure and SEZs too will be treated as real estate for lending purposes, both will compete for the limited resources • A higher provisioning and risk weightage will require banks to allocate more capital towards advances to SEZs and compel them to increase lending rates A banker said, every bank board has a ceiling on exposure to the commercial real estate sector. Now that SEZs have been clubbed along with real estate, both SEZs and the real estate sector would have to compete for the limited resources. The commerce ministry is obviously not amused. Officials in the ministry said there was no need for the RBI to categorise SEZs in this manner. “It could have left it to individual banks to decide on the exposure they want to take. Now, Indian banks will find it difficult to participate in good projects,” said an official. According to the ministry, banks should still not have a problem lending to developers with expertise in the real estate sector. However, a majority of the SEZs are not looking at Indian banks for funding since they do not have the capability to fund such large projects, an official said. “SEZ developers are looking more at FDI. Also, an overseas partner can help in bring in investment and marketing the projects to FIIs,” he added. Realty advisor DTZ’S MD Ankur Srivastava said, “The RBI move differentiates between IT SEZs and IT Parks. The equity participation in SEZs will go up rather than debt.”


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