RBI's Loan Recast Framework Comes as a Revival Measure for COVID-19 Hit Realty Projects

RBI's Loan Recast Framework Comes as a Revival Measure for COVID-19 Hit Realty Projects

The RBI’s loan recast now allows the banks to restructure loans of real estate companies at the project levels. This scheme comes as a major relief for the developers whose project has been halted due to the liquidity crunch caused due to the COVID-19 pandemic.

Commenting on RBI’s move, Anuj Puri, Chairman, Anarock Property Consultants states that this measure of RBI would enable the banks to work on the restructuring of loans of real estate companies at the project level rather than the entity level is indeed a good measure.

Further, he adds, "It will help restart projects which have been stuck due to the impact of the COVID-19 pandemic. Both buyers and developers will stand to gain when stuck projects will eventually see the light of the day.”

Anuj has also pointed out the buyer’s standpoint, as they do not have to wait for an undefined time period to acquire their homes. On the developer’s side, they would be getting the requisite liquidity to eventually wrap up their projects. Thus, this move would ease the liquidity flow within the cash-strapped real-estate sector that has been struggling even before the COVID-19 pandemic spread. However, the novel virus spread has worsened the scenario. He further stated that, although the RBI has approved the measure to the banks, it has been observed how it would be executed by the banks.

According to RBI, the requirement of an inter-creditor agreement (ICA) in respect of the entity to which lending institutions have exposure is a basic feature of Prudential Framework for Resolution of Stressed Assets dated June 7, 2019, and consequently that of the resolution framework for COVID-related stress.

“There is sufficient flexibility to the lending institutions to formulate ICAs in respect of a legal entity to which they have the exposure that addresses the specific requirements of each borrower on a case to case basis, including designing different resolution approaches for different projects under the same borrower within an ICA,” states RBI in an FAQs on Resolution Framework for Covid-19 related stress.

The bank further adds, “Only in respect of borrowers belonging to the 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.”

Likewise, other than setting up the escrow account for the legal entity level that the resolution framework demands. There would be no prohibition in setting up any supplementary escrow accounts at each project level if the lenders prefer.