The Reserve Bank of India’s draft guidelines on classification of commercial real estate exposure of banks may provide some relief on loans provided for acquisition of units in special economic zones.

On other counts, however, RBI has not found merit in the commerce ministry’s argument to keep loans for SEZ development outside the ambit of commercial real estate (CRE) exposure. It has reiterated that bank exposure for purchase of land for an SEZ and its development, will be classified as commercial real estate, while infrastructure development will not be treated in the same manner.

Bankers, however, said more clarity will be required on the issue.

The central bank’s draft guidelines issued this evening have drawn upon the Basel II framework on income producing real estate (IPRE) and high volatility commercial real estate and the US Federal Reserve’s definition of CRE lending as income producing commercial property loans and commercial or residential developmental loans.

While it has not elaborated on high volatility commercial real estate for want of documented history of real estate cycles in India, RBI has drawn upon Basel II framework’s definition of IPRE.

Under the framework, IPRE refers to a method of providing funding to real estate such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels, where the prospects for repayment and recovery depend primarily on the cash flows generated by the asset. The primary source of cash flows is lease or rental payments or the sale of the asset. The definition will hold even if the borrower is not a real estate player. “The distinguishing characteristic of IPRE versus other corporate exposures that are collateralised by real estate is the strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property,” the draft guidelines said.

So, if either the repayment or the recovery does not depend upon the real estate, the exposure need not be defined as IPRE or CRE. However, in cases where the exposure is unsecured and the source of repayment is sensitive to change in real estate prices, the exposures would be classified as CRE exposure, RBI said.

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