Tighter project finance rules squeeze real estate lenders

THE PROJECT FINANCING guidelines of the Reserve Bank of India (RBI) for real estate, which became applicable from October 1, have made life difficult for lenders, including NBFCs, banks, housing finance companies and other RBI-regulated entities.

- RAGHAVENDRA KAMATH

The guidelines state that whenever a lender underwrites a project, the debt-to-equity ratio must be maintained at the same level throughout the project’s lifecycle. Lenders cannot extend any top-up loan over and above the originally sanctioned amount, which remains fixed.

Though the RBI wants lenders to maintain financial discipline and prevent developers from taking money out of projects midway, lenders’ hands are tied as they cannot sanction additional amounts during execution without risking client relationships, sources at lending companies said. “More often than not the top-up loans were misused. Now developers cannot take out the money out of the projects. RBI wants that as a project lender you should ensure developers cannot take money out of the projects and have skin in the game,” said a senior banking executive who did not want to be identified.