The Reserve Bank of India on Wednesday clamped down banks' financing of special economic zones by directing them to treat exposure to SEZs as lending to commercial real estate, "keeping in view the current market conditions."
This means the banking regulator feels the SEZs, which till now have been treated as infrastructure, are a real estate play.
The change in classification will almost dry up bank funding for SEZ projects, besides leading to a sharp rise in interest rates for SEZs, as commercial real estate has a higher risk weight and requires higher provisioning by banks.
Globally, real estate is considered a sensitive sector for banks. "Exposure of banks to entities for setting up SEZs or (to entities) for acquisition of units in SEZs, which includes real estate, would be treated as exposure to the commercial real estate sector with immediate effect," the RBI said in a notification.
The change in the RBI's treatment of lending to SEZs means banks now have to make higher provisions and assign a higher risk weight for allocation of capital.
The risk weight on exposures to commercial real estate is 150 per cent. It has gone up by 50 percentage points since July 2005.
The general up-front provisioning requirement for exposure to commercial real estate is 1 per cent, against 40 basis points for lending to non-sensitive sectors. One basis point is one hundredth of a percentage point.
A State Bank of India executive said: "Since banks will have to set aside a higher amount of capital, the ability of banks to fund big-ticket SEZ projects will come under pressure. We were already charging half a percentage point higher interest on loans sanctioned for SEZ projects. Now, the rates will rise further for any of the projects chosen for lending."
A senior IDBI Bank executive also pointed out that interest rates for SEZ loans would rise significantly and banks would adopt a "pick and choose approach".
The government has cleared 150 SEZ proposals and 200 more proposals are pending clearance. An SEZ is a specifically delineated duty-free enclave. However, by some estimates, nearly 70 per cent of the land projected by developers was not available with them earlier this year.
For instance, in April this year, as many as 125 projects for over 213,023 acres (86,208 hectares, which is more than half the area of the national capital) were before the government.
Of these, 37 projects did not have land, a massive 148,290 acres, or 70 per cent of the projected land size of these SEZs.
A public sector bank chief said: "This guideline has come in the backdrop of very surprising land use pattern for SEZs (25 per cent for productive purposes and 75 per cent for support services, including residential), which has all the trappings of the SEZ activity taking the shape of land grabbing and real estate play."
The banking sector's exposure to the commercial real estate sector was nearly Rs 40,000 crore (Rs 400 billion) at the end of March 2006, up 84 per cent over a year earlier. ICICI Bank has the highest exposure of Rs 6,984 crore (Rs 69.84 billion), followed by State Bank of India with Rs 4,574 crore (Rs 45.74 billion) and Punjab National Bank with Rs 2,663 crore (Rs 26.63 billion).
Exposure to commercial real estate includes lendings secured by mortgages on commercial real estate (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, and land acquisition, development and construction). Exposure also includes non-fund based limits.
The RBI had, in its annual report released last month, stated: "There are concerns that the SEZs could aggravate the uneven pattern of development by pulling out resources from less developed areas. Revenue implications of taxation benefits would also need to be factored. The revenue loss may be justified only if SEZ units ensure forward and backward linkages with the domestic economy."
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