SEZs who?
RBI signals they are a real estate play
The Reserve Bank of India has clarified in no uncertain terms that Special Economic Zones must be treated as commercial real estate rather than a priority sector proposition for bank lending. This clarification straightaway raises the cost of funds for SEZ developers, besides sharply reducing the availability of funds. SEZs were hitherto categorised as infrastructure projects, and carried a risk weightage of 100%. No longer. Banks will now have to allocate much more capital towards advances to SEZs, similar to the commercial real estate sector. RBI had earlier hiked the provisioning requirement on advances to the latter to 1%, besides raising the risk weightage to 150%, as this sector was exhibiting all the characteristics of a speculative bubble. There are thus no prizes for guessing that SEZ developers will hardly be amused, as they have to compete for a shrinking pool of costlier capital!
RBI’s latest move is, of course, very much in line with the tone and tenor of its annual report for 2005-06, in which it clearly indicated that SEZs could aggravate the uneven pattern of development by pulling out resources from less developed areas. More important, the revenue implications of the various tax boondoggles also needed to be factored in. A ballpark estimate of fiscal experts is that for every rupee of additional investment that would flow into SEZs, the revenue loss for the exchequer is as much as Rs 1.43. Thus, if Rs 100,000 crore is the expected order of investments, the fisc would have to forego Rs 143,000 crore of tax revenues. Doubtless, higher estimates are floating around, but the basic point RBI hammered home is that such incentives may be justified only if SEZs ensure forward and backward linkages with the economy.
RBI’s latest clarification, therefore, clearly signals that SEZs in their current avatar are only a real estate play. The upshot is that banks from now on would have to do their homework before they increase their exposure to SEZs. Allocating more capital towards advances to SEZs would, of course, compel them to hike their lending rates as well. True, developers with genuine expertise in this business ought to face no serious problem with bank funding, but many who are eagerly queuing up with their proposals surely would. Although the Union commerce ministry might demur against RBI’s move, a favourable consequence is the prospect of equity, rather than debt, going up in SEZs. Isn’t that a recipe for genuine investments flowing into SEZs?
http://www.financialexpress.com/fe_full_story.php?content_id=141098
The Reserve Bank of India has clarified in no uncertain terms that Special Economic Zones must be treated as commercial real estate rather than a priority sector proposition for bank lending. This clarification straightaway raises the cost of funds for SEZ developers, besides sharply reducing the availability of funds. SEZs were hitherto categorised as infrastructure projects, and carried a risk weightage of 100%. No longer. Banks will now have to allocate much more capital towards advances to SEZs, similar to the commercial real estate sector. RBI had earlier hiked the provisioning requirement on advances to the latter to 1%, besides raising the risk weightage to 150%, as this sector was exhibiting all the characteristics of a speculative bubble. There are thus no prizes for guessing that SEZ developers will hardly be amused, as they have to compete for a shrinking pool of costlier capital!
RBI’s latest move is, of course, very much in line with the tone and tenor of its annual report for 2005-06, in which it clearly indicated that SEZs could aggravate the uneven pattern of development by pulling out resources from less developed areas. More important, the revenue implications of the various tax boondoggles also needed to be factored in. A ballpark estimate of fiscal experts is that for every rupee of additional investment that would flow into SEZs, the revenue loss for the exchequer is as much as Rs 1.43. Thus, if Rs 100,000 crore is the expected order of investments, the fisc would have to forego Rs 143,000 crore of tax revenues. Doubtless, higher estimates are floating around, but the basic point RBI hammered home is that such incentives may be justified only if SEZs ensure forward and backward linkages with the economy.
RBI’s latest clarification, therefore, clearly signals that SEZs in their current avatar are only a real estate play. The upshot is that banks from now on would have to do their homework before they increase their exposure to SEZs. Allocating more capital towards advances to SEZs would, of course, compel them to hike their lending rates as well. True, developers with genuine expertise in this business ought to face no serious problem with bank funding, but many who are eagerly queuing up with their proposals surely would. Although the Union commerce ministry might demur against RBI’s move, a favourable consequence is the prospect of equity, rather than debt, going up in SEZs. Isn’t that a recipe for genuine investments flowing into SEZs?
http://www.financialexpress.com/fe_full_story.php?content_id=141098
posted by Sudarshan Rodriguez at 1:01 PM
0 Comments:
Post a Comment
<< Home