RBI Opens Door for Offshore Loans in Real Estate Sector

The Reserve Bank of India (RBI) is considering a significant shift in its foreign loan policy by potentially allowing external commercial borrowings (ECB) in the real estate sector. This move marks a departure from a long-standing stance against such borrowings, a position that has been held for over three decades since the aftermath of the 1997 Asian Crisis.

The RBI’s draft ECB policy suggests that the central bank is now open to permitting ECBs for all real estate projects eligible for foreign direct investments (FDI). This would mean that any project qualifying for foreign equity could also attract foreign loans. Currently, ECBs are restricted to larger projects, such as industrial parks, integrated townships, and special economic zones (SEZs). The new policy aims to broaden this scope, indicating a willingness to include real estate projects under the ECB framework.

The draft policy explicitly states that ECBs cannot be utilized for “real estate business and construction of farmhouses, except for activities or sectors permitted for FDI.” Traditionally, “real estate business” encompasses trading in properties and leasing activities. However, the proposed changes imply that if a project qualifies for FDI, it may now also qualify for ECBs.

Motivations Behind the Policy Shift

The RBI’s motivations appear to be multifaceted. A primary objective is to boost the supply of US dollars, which could help stabilize the Indian rupee amidst ongoing pressures from foreign portfolio investor withdrawals and tariffs affecting exports. Facilitating easier access to ECBs could be an effective strategy to increase dollar inflows.

Additionally, the Indian real estate sector has evolved significantly in recent years, bolstered by the implementation of the Real Estate (Regulation and Development) Act (RERA) and the growth of Real Estate Investment Trusts (REITS). While some experts caution that cash transactions still dominate many deals, others believe that the sector is now better equipped to manage the associated risks.

Another key factor influencing the RBI’s decision could be the rise of powerful corporate players in the real estate market. The involvement of large, influential firms pursuing substantial property projects may have created a compelling case for revising the lending rules surrounding ECBs.

The draft policy also hints at potential relaxation of rules regarding eligible lenders. Currently, lenders must be residents of countries that adhere to guidelines set by the Financial Action Task Force (FATF) or the International Organization of Securities Commissions (IOSCO). Under the proposed changes, a “recognised lender” would simply be defined as “a person resident outside India.”

Implications for the Real Estate Market

The proposed changes could provide significant benefits for various businesses within the real estate sector. Currently, banks are unable to extend loans to private builders for land purchases, even if the land is designated for commercial or residential development. Builders often resort to Joint Development Agreements with landowners as an alternative financing method. The new framework would enable the use of ECBs to acquire land intended for construction projects.

Pankaj Bhuta, founder of P. R. Bhuta & Co., which specializes in tax and forex regulations, highlighted the potential for increased funding options. He noted that the ability to access ECBs for land purchases could transform financing strategies for builders.

Similarly, the proposed changes could allow limited liability partnerships (LLPs) to borrow from non-resident Indian (NRI) partners, further expanding the avenues for funding real estate initiatives. Isha Sekhri, a partner at Isha Sekhri Advisory LLP, emphasized that the draft policy would enhance access to capital for various entities involved in property development.

As the RBI continues to refine its draft policy, the implications for the real estate sector could be profound, ushering in a new era of financing opportunities that may reshape the landscape of Indian real estate in the years to come.