The Reserve Bank of India (RBI) has come out with revised draft guidelines on commercial real estate (CRE) exposures. The revision comes in the wake of doubts raised in certain quarters on treatment of specified exposures. The new draft is also necessitated by the need to align with the rules with the Basel-II framework.
The Basel-II framework has clearly spelt out the definition of income-producing real estate (IPRE) in para 226 of its framework. According to the Basel-II framework, IPRE has a 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 apex bank has chosen to align the definition of commercial real estate (CRE) exposure with the Basel II prescription. Going by this, the RBI has clarified in its revised draft guidelines that “if the repayment primarily depends on other factors such as operating profit from business operations, quality of goods and services and tourists arrivals, the exposure would not be counted as commercial real estate.
Any exposure would be classified as IPRE/CRE exposure if the funding results in the creation/acquisition of real estate (such as office buildings to let, retail space, multi-family residential buildings, industrial or warehouse space and hotels) where the prospects for repayment would depend primarily on the cash flows generated by the asset.
More : hindu.com
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