Commerce Dept Urges RBI to Treat Loan for SEZs as Infrastructure Financing

August 6, 2009	(Be the first to rate this story!)  Loading ...
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The commerce department has urged the Reserve Bank of India (RBI) to treat all bank loans to developers of special economic zones as infrastructure financing, eligible for a lower interest rate. The ministry has said the concessional rate of interest should be given even if the developer leases out or rents a part of the land to other units within the zone. The RBI had earlier proposed that land rented out would be considered a commercial realty activity, which would not get concessional interest rates from banks.

The central bank had said that since repayment of loans by developers who rent out units was linked to real estate prices and not economic activity, it was a real estate activity. The commerce department, however, disagrees. “We have pointed out to the RBI that ultimately repayment of all loans taken by developers are linked to economic performance of units and hence there should be no discretion in classification of SEZ development activities as infrastructure or real estate projects. All activities should be treated as infrastructure,” a commerce department official, who did not want to be named, told ET. Infrastructure projects get funds at about 2% lower interest rates compared to real estate projects, and also have access to funds earmarked for infrastructure activities.

While all SEZ activities, at present, are classified as real estate activities in terms of bank exposure, the RBI had last month defined SEZ projects as infrastructure projects. It then came up with draft commercial real estate exposure guidelines which, once formalised, would give clear instructions to banks on SEZ funding. As per the guidelines, if a SEZ is being developed by a single company entirely or mainly for its own use, and the repayment depends on the cash flows generated by the economic activities of the units in the SEZ and the general cash flow of the company rather than the level of real estate prices, it should not then be classified as CRE but as infrastructure lending.

Similarly, if there are co-developers in a SEZ who undertake a specific job, such as provision of sewerage or electrical lines, and they are paid by the main developer based on the work in progress, such exposure will be classified as infrastructure lending, the draft notification said. However, if the SEZ developer leases or rents out units, then the loans given for such projects would be classified as real estate. The RBI is open to making changes in the draft guidelines based on the response it receives.

News Published Under:   Special Economic Zones |

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