Reflecting its reservations on the policy for Special Economic Zones (SEZs), the Reserve Bank of India on Thrusday ruled out any concessional finance to developers and units in these zones, saying they should be treated on par with real estate projects.
Coinciding with the Centre's ongoing exercise for finalising the guidelines for states on land-related issues for SEZs, the apex bank also directed the nationalised banks to offer credit to SEZs on same terms and conditions as offered to real estate developers.
"Like any other land, it (SEZ) is real estate," RBI Governor Y V Reddy told reporters on the sidelines of a seminar on Financial Education in New Delhi when asked if the latest directive would make the funding for SEZs costlier.
In a notification on Wednesday night, RBI said, "Keeping in view the current market conditions, it has been decided that the exposure of banks to entities for setting up SEZs or for acquisition of units in SEZs, which includes real estate, would be treated as exposure to commercial real estate sector with immediate effect."
RBI had recently expressed its reservations about the concessional tax regime for SEZs, saying this would take away resources from other areas and lead to uneven development.
RBI's views lend support to apprehensions expressed by the finance ministry that SEZs would lead to massive revenue loss to the exchequer due to various tax sops given to 150 SEZs already cleared and 225 others that are pending.
The IMF too cautioned India last week to take a second look at its SEZ policy, saying tax sops may divert a lot of activity from the rest of the economy into these zones, creating problems of inequitable regional development.
According to finance ministry's estimates, SEZs could lead to a revenue loss of Rs 175,000 crore (Rs 1,750 billion) in direct taxes, customs and excise duties over the next five years, while the commerce ministry says the zones will lead to Rs 44,000 crore (Rs 440 billion) revenue gain for the government in a year.
Commerce Minister Kamal Nath had taken exception to IMF's criticism of the country's SEZ policy, saying losses were only notional. "When there is no levy how can you say it could lead to revenue loss," he had said last week.
Banks would also have to make provisions as also assign appropriate risk weights for such exposures as per the existing guidelines, the RBI notification said.
The RBI decision is aimed at limiting the exposure of commercial banks to SEZs that could also lead to increase in interest rates for such projects as real estate funding carries a higher risk weight.
Exposure to real estate includes lending to office buildings, retail space, residential buildings, commercial premises, industries and hotels.
The central bank had earlier increased upfront provisioning requirement for exposure to commercial real estate to one per cent against 0.40 per cent for lending to non-sensitive sectors. It means that banks have to keep 60 paise more for every Rs 100 they lend to commercial real estate.
The risk weight on commercial real estate has gone up by 50 per cent to 150 per cent since July, 2005.
The RBI decision to treat SEZs as commercial real estate projects also means that these zones would not enjoy benefits given to infrastructure projects.
While lending to infrastructure projects carries a risk weight of 100 per cent, those to real estate projects has a risk weight of 150 per cent. This means that lending to SEZs would now not only be costlier, but banks would also have lower funds to provide lending to SEZ developers and units.
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