RBI makes lending to SEZs costlier
Banks have been directed to treat loans to special economic zones on par with lending to real estate sector.india Updated: Sep 21, 2006 16:56 IST
The Reserve Bank of India has directed banks to treat loans to special economic zones (SEZ) on par with lending to real estate sector, a development that could prove to be a dampener in India Inc's rush to set up SEZs.
"Keeping in view the current market conditions, it has been decided that the exposure of banks to entities for setting up SEZs or for acquisition of units in SEZs, which includes real estate, would be treated as exposure to commercial real estate sector with immediate effect," the central bank said in a notification.
Banks would also have to make provisions as also assign appropriate risk weights for such exposures as per the existing guidelines, the notification said.
The RBI decision is aimed at limiting the exposure of commercial banks to SEZs and could also lead to increase in interest rates for such projects as real estate funding carries a higher risk weight.
Exposure to real estate includes lending to office buildings, retail space, residential buildings, commercial premises, industries and hotels.
The central bank had in its annual report last month also raised concern on the SEZ scheme, saying it could result in uneven economic development in the country.
"There are concerns that 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 domestic economy," the RBI had said in August.
The government has so far cleared 150 SEZ proposals and 225 more proposals are pending, involving about one lakh hectares of land across various states.
The RBI decision to treat SEZs as commercial real estate projects also means that these zones would not enjoy benefits given to infrastructure projects.
While lending to infrastructure projects carries a risk weight of 100 per cent, those to real estate projects has a risk weight of 150 per cent. This means that lending to SEZs would now not only be costlier, but banks would also have lower funds to provide lending to SEZ developers and units.
The debate over the SEZ scheme has intensified over the past few weeks. In fact, there are major differences within the government.
The finance ministry is concerned over loss of Rs 90,000 crore in revenue on account of tax sops given to SEZs, but the commerce ministry is actively pushing for these zones on grounds that SEZs would attract investments of Rs 1,00,000 crore over the next 2 to 3 years and provide jobs to five lakh people.