The Reserve Bank of India today clamped down on banks' financing of special economic zones (SEZs) by directing them to treat exposure SEZs as lending to commercial real estates, "keeping in view the current market conditions".This essentially means that the banking regulator consider that the SEZs, which have till now been treated as infrastructure, are real estate plays. The change in classification will lead to near drying up of bank funding for SEZ projects and a sharp rise in interest rates for SEZs as commercial real estates have higher risk weightage and require higher provisions 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 commercial real estate sector with immediate effect," RBI said in a notification.The change in RBI's treatment of lending to SEZs means banks now have to make higher provisions and assign higher risk weightage 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 upfront 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 official said: "Since banks will have to set aside 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 will rise significantly and banks will adopt a "pick and choose approach".The government has cleared 150 SEZ proposals involving ..... acres of land and 200 more proposals concerning ... acres of land are still pending clearance. An SEZ is a specifically delineated duty free enclave and is deemed to be a foreign territory for the purposes of trade operations and duties and tariffs.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 commercial real estate sector was nearly Rs 40,000 crore at the end of March 2006, up by 84 per cent over a year earlier. ICICI Bank has the highest exposure of Rs 6,984 crore followed by State Bank of India (SBI) with Rs 4,574 crore and Punjab National Bank (PNB) with Rs 2,663 crore.Exposure to commercial real estate includes lendings secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction). Exposure also includes non-fund based limits.RBI had in its annual report, released last month, stated that "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."
