Update

CRE-RH New Sub-sector in commercial real

estate sector good news for developers

Nidhi Bothra
nidhi@vinodkothari.com
17th February, 2014

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CRE-RH New Sub-sector in commercial real estate sector

good news for developers

Update
Commercial Real Estate (CRE) has been defined by RBI1 in lines with the Basel II norms
to be any income producing real estate (IPRE) the primary source of cashflows being
lease or rental payments or sale of assets. Exposure in CRE meant funding will result in
the creation / acquisition of real estate and the prospects for repayment would depend
primarily on the cash flows generated by the asset.
RBI while defining CRE exposure had also laid down illustrative list of exposures that
should be classified as CRE exposures and included:
a) Loans extended to builders towards construction of any property which is
intended to be sold or given on lease.
b) Loans extended to builders towards construction of any property which is
intended to be sold or given on lease.
c) Loans for multiple houses intended to be rented out.
d) Exposures towards purchase of land for setting up SEZs and development thereof.
e) Loans for integrated township projects.
f) Exposures to real estate companies.
g) Exposures to MFs/VCFs/PEFs investing primarily in the real estate companies.
h) General purpose loans where repayment is dependent on real estate prices.
Recently, RBI vide a notification2 dated 28th January, 2014 had created a sub-sector
called Commercial Real Estate Residential Housing (CRE-RH). Loans to residential
housing projects under the Commercial Real Estate would come under this sub-sector and
shall include loans to builders/ developers for residential housing projects (except for
captive consumption) under CRE segment. Such projects should not include nonresidential commercial real estate however integrated housing projects comprising of
some commercial space whereby the commercial area in the residential housing project
does not exceed 10% of the total Floor Space Index (FSI) of the project could be
included.
Typically an exposure in CRE sector would attract a risk weight of 100% and would
require provisioning of 1% for standard assets. RBI in the recent notification, while
carving out the sub-sector also stated that owing to lesser risk and volatility in CRE-RH
sector the risk weights on CRE-RH exposure would be 75%. Also the standard asset
provisioning for CRE-RH would be 0.75% as against 1% in CRE segment exposure.

Guidelines on Classification of Exposures as Commercial Real Estate (CRE) Exposures, Sept 9, 2009
http://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5261
2
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8713&Mode=0

CRE-RH New Sub-sector in commercial real estate sector

good news for developers

Update
The position that emerges in risk weights and provisioning norms in the real estate sector
is as below:
Exposure

Risk Weight

Individual Housing Loans

a. Up to Rs. 20 lakh
b. Above Rs. 20 lakh and
up to Rs. 75 lakh
c. Above Rs.75 lakh
CRE-RH
CRE

Provisioning Norms for

standard assets

50%
50%

0.40%
0.40%

75%
75%
100%

0.40%
0.75%
1%

While real estate sector is fund starved currently, this may be seen as a welcomed
announced for banks, PE investors and AIFs for taking an exposure in CRE-RH segment.

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