The Reserve Bank of India (RBI) has done well to liberalise lending to Real Estate Investment Trusts (REITs). Now, banks can lend to REITs directly, instead of going through special purpose vehicles. With bank lending rates moving lower, REITs can access more funds at lower cost to scale their operations. Banks too can grow their loan books through this segment.
The five listed REITs hold assets worth ₹2.5 lakh crore and enjoy market capitalisation of ₹1.72 lakh crore. Yet the Indian REITs industry has not achieved the scale seen in other countries. It forms a small part of the over $2.2 trillion global REITs market. REITs can play an important intermediation role in channelising household savings into the real estate market. The stock market regulator has been making a series of changes in this segment in the recent past to improve investor demand and awareness. These include classifying REITs as equity instruments to allow mutual funds to invest in them, allowing REITs to be included in equity indices and expanding the scope of strategic investors in these instruments. The RBI is acting in concert. But given the cyclicality in real estate prices, banks face higher credit risk. To this end, the RBI has introduced some guardrails to ensure that banks do not increase their stressed assets.
Under these norms, total bank credit taken by a REIT and its SPVs is being capped at 49 per cent of its assets. REITs will be encouraged to explore other sources of funding such as the bond market. The RBI has disallowed bullet and balloon repayment models here, perhaps in view of risk posed by cyclical swings. Under such arrangements, the initial instalments are small, with a large lumpsum falling towards the end of the loan tenure. Restricting bank lending to publicly listed REITs is also a good idea since listed entities face greater scrutiny and are more transparent in their operations. Other stipulations include: First, REITs availing of credit should be well established, with three years of operations and distributable cash flows in the two preceding financial years; second, special purpose vehicles should not be in financial distress or under regulatory action for any misconduct; third, banks should finance finalised projects, and not refinance existing loans; and finally, loans should be fully secured through mortgage of assets in REIT.
The central bank can however review the rule that lending to REITs can be up to 10 per cent of a bank’s eligible capital base. This ceiling appears too high given the size of the REIT segment in the economy. The RBI will also have to be extra vigilant in the initial years to monitor the end use of funds lent to REITs. The caution should be viewed against a history of defalcation in this sector by large developers. The Real Estate (Regulation and Development) Act, 2016 has worked to an extent in tightening processes. In sum, the sector should be liberalised, but with an element of circumspection given the intrinsic risks.
Published on February 27, 2026