Guidelines on Classification of Exposures as Commercial Real Estate (CRE) Exposures

All Commercial Banks
(excluding RRBs)

Dear Sir,

Guidelines on Classification of Exposures as Commercial Real Estate (CRE) Exposures

Please refer to our circular DBS.CO.PP.BC.21/11.01.005/2004-05 dated June 29, 2005 on the captioned subject, inter alia, defining CRE Exposures.

  1. In view of a number of queries received from banks and other quarters as to whether or not certain exposures should be treated as CRE Exposures, as also in the light of switching over to Basel-II Framework which has specific provisions relating to such exposures, it was decided to review the definition of CRE Exposure. Draft guidelines were placed twice on the RBI website vide our circulars DBOD.BP.No. 11021/08.12.015/2008-09 dated January 7, 2009 and DBOD.BP.No.502/ 08.12.015/ 2008-09 dated July 7, 2009, respectively, for comments of banks and general public.

    3. After duly considering the comments and suggestions received, final guidelines on classification of CRE Exposures are now given in the Annex. It may be clarified that the guidelines are based on principles and the examples given in Appendix 2 are illustrative and not exhaustive. Based on the principles and the examples, banks should be able to determine whether an exposure is CRE or not and should record a reasoned note justifying the classification. Further, it is possible that an exposure could have multiple classifications, such as CRE, Infrastructure Lending, Capital Market Exposure, etc. In that case, in all regulatory reporting to the Reserve Bank, the exposure should be reported under all relevant classifications, with a footnote to avoid double counting, and would attract all regulatory concessions and limits, if any, applicable to the classifications.

  2. The guidelines contained in this circular would be applicable with immediate effect.

    Yours faithfully

    B. Mahapatra
    Chief General Manager

    1.1 Real Estate is generally defined as an immovable asset - land (earth space) and the permanently attached improvements to it. Income-producing real estate (IPRE) has been defined in para 226 of the Basel-II Framework, which is reproduced below:

    1.2 From the definition of IPRE given above it may be seen that for an exposure to be classified as IPRE/CRE, the essential feature would be that the funding will result in the creation / acquisition of real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels) where the prospects for repayment would depend primarily on the cash flows generated by the asset. Additionally, the prospect of recovery in the event of default would also depend primarily on the cash flows generated from such funded asset which is taken as security, as would generally be the case. The primary source of cash flow (i.e. more than 50% of cash flows) for repayment would generally be lease or rental payments or the sale of the assets as also for recovery in the event of default where such asset is taken as security.

    1.3 These guidelines will also be applicable to certain cases where the exposure may not be directly linked to the creation or acquisition of CRE but the repayment would come from the cash flows generated by CRE. For example, exposures taken against existing commercial real estate whose prospects of repayments primarily depend on rental/ sale proceeds of the real estate should be classified as CRE. Other such cases may include: extension of guarantees on behalf of companies engaged in commercial real estate activities, exposures on account of derivative transactions undertaken with real estate companies, corporate loans extended to real estate companies and investment made in the equity and debt instruments of real estate companies.

    2. Approach followed by RBI

    2.1 The definition of Commercial Real Estate exposure is closely aligned to Basel II definition and would be as at para 1.2 to 1.3 above. It follows that if the repayment primarily depends on other factors such as operating profit from business operations, quality of goods and services, tourist arrivals etc., the exposure would not be counted as Commercial Real Estate.

    2.2 As regards financing of land acquisition by banks the extant instructions are contained in our Master Circular DBOD. No. DIR. (HSG). BC.08/08.12.01 /2009-10 dated July 1, 2009 on Housing Finance. In terms of this circular, banks may extend finance to public...

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