Real Estate Loans Restructuring on Project Basis
The Reserve Bank of India (RBI) has permitted banks to restructure loans to real estate companies on the basis of the project rather than the developer.
It has also indicated that banks can restructure loans drawn by a borrower during the current fiscal, provided the account was classified as ‘standard’ (not overdue for more than 30 days) as on March 1, 2020.
These clarifications were issued by the central bank on the resolution framework for Covid-related stress announced last month. RBI said, “Only in respect of borrowers belonging to real estate sector, and have both residential and commercial real estate business, the prescribed thresholds for the financial parameters may be applied at the project level.”
The RBI also cleared the confusion on whether only that loan which was outstanding as on March 1, 2020 is available for resolution. It said the March 1 deadline is for determining eligibility, whereas the actual loan that may be considered for resolution will be the one that is outstanding as on the date of invocation of the resolution framework.
This is a very significant development as many real estate projects have got stuck at the last stage for want of funds because of a default at the corporate level. As a result of this default, lenders have not been able to extend funds to projects even if it is in their best financial interest to ensure completion.
RBI said that a basic requirement of its prescriptions for loan restructuring, issued in June 2019, was that there should be an inter-creditor agreement among all lenders. It added that this framework provides banks with enough flexibility to restructure loans on a project basis. That’s because the projects are considered separate legal entities and therefore there is no bar on creating separate escrow accounts.