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Home > Business > Special

Is RBI's directive unfair to SEZs?

Business Standard | September 27, 2006

Most have seen the move to equate bank lending to SEZs with lending to real estate as a means to raise borrowing costs for such units.

Former whole time member SEBI & ex-Chairman, United Bank of India,

If SEZs are globally competitive, they can raise funds abroad � huge exposures here will lead to an asset-liability problem.

The sharp reactions to the recently announced RBI's directive for banks to treat the loans for Special Economic Zones at par with those for commercial real estate, stem from a lack of adequate conceptual clarity, both about the purpose of SEZs as well as about the role of the RBI as the central bank of the country.

SEZs are established essentially to create a designated duty-free enclave, which is treated as foreign territory for trade operations, duties and tariffs. The objective is to provide as far as possible a level playing field to the enterprises in SEZs at par with their counterparts in the world arena.

The units in such SEZs have full freedom to raise global resources from international banks or to rope in FDI on the parameters generally available to the enterprises in the free world, pre-requisites for which are to benchmark their operations, governance, cost and quality to global standards.

The SEZ, thus, are the propellers for economic growth through manufacturing excellence. Also, the host country gains in terms of growth in employment, flourishing level of economic activity and so on.

In this context, the thought that SEZs should be funded by local banks will be counter productive to the very notion on which they are established. The cost of funds of local banks is likely to be higher, and to that extent, it will not be conducive in developing cost competitiveness for units in a SEZ.

Moreover, local banks, without having balance sheet strength akin to that of international banks would not be able to meet the growing requirements of SEZs on an ongoing basis. As such, their growth may remain stunted.

The RBI's recent directive is absolutely apt as it has the primary responsibility as a central bank to ensure that banks in the country remain healthy and viable. The maturity profile of deposits of banks has undergone a change in recent years, with accretion in short-term deposits up to two years forming 65 per cent of the total deposits.

The exposure to commercial real estate, which is long-term in nature, was 84 per cent higher for the financial year ending 2005, that is, last year. In case banks take up large-scale financing of SEZs, they will be exposing themselves to asset-liability mismatch.

The RBI has therefore not only tried to define the nature of exposure and inherent risk associated with it, it has also reminded the players in the proposed SEZs to develop their functioning in such a way that they create appropriate environment right from the beginning to attract large international resources on a continuous basis for sustained

While on the face of it, the RBI's current move seems to be protecting local banks at the cost of undermining the interest of SEZs, this is an exceptionally good measure for directing the prospective SEZs not to be inward-looking, but to conduct their operations with the aim of attaining global excellence.

Vivek Mehra
Executive director, PricewaterhouseCoopers Pvt Ltd

A large SEZ is like a huge integrated township, so where's the question of treating this like lending to real estate.

The SEZ controversy rages on endlessly. It is unfortunate that in spite of Parliament having passed the SEZ Act, all arms of the government are not fully behind it.

The latest salvo is from the RBI seeking to treat entire SEZs in the same category as commercial real estate from risk weightage and provisioning requirements.

Does India really want to become a global manufacturing hub I am sure the answer will be a unanimous yes. But has anybody thought of how this is to happen?

To attract the global mobile investors, labour costs, infrastructure and its cost and tax incentives are all of critical importance. Hence, offering a competitive environment is necessary.

The advantageous demographics that India has can only be dividended if there are employment opportunities provided to the teeming millions of youngsters who are entering the job market and particularly those from the rural areas where two-thirds of the youngsters reside - a point that the prime minister has repeatedly made.

Clearly, the SEZ policy provides the answer - it incentivises the creation of both industrial infrastructure as well as social infrastructure simultaneously and with tax incentives, minimises the
cost of the same.

No doubt, there is a kind of gold rush for SEZs, and there could be some speculative real estate activity, but we must not paint the entire SEZ scenario with the same brush. The recent parameters laid down by the Board of Approval regarding the facilities to be provided both in the processing area and in the social infrastructure area as well as the
minimum net worth/investment criteria would to a large extent address the concerns about misuse/speculative real estate activity.

A multi-product SEZ project in its entirety is equal to a very large integrated township. A SEZ developer has to provide complete infrastructure - from power to roads and ports to water supply and sewerage. How can this be equated with commercial real estate?

At best, loans relating to social infrastructure may be put at par with real estate, but surely, the processing area cannot be treated as commercial real estate. The smaller SEZs are largely in the IT sector, which again cannot be equated to commercial real estate.

The RBI's increase in risk weightage to 150 per cent could result in increase in interest rate by 1-2 per cent and an additional provisioning requirement in bank's profit and loss accounts of 0.75 per cent of the SEZ loans. Hence, not only will loans to SEZs become expensive, but also difficult to source.

As a result, the infrastructure in SEZs, including power plants, sewerage, roads and so on, will all become expensive, and hence, less competitive for mobile investors.

Clearly, a rethink is necessary.

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