Hospitals, hotels of owner-users not commercial

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Mumbai, Jan. 7

Entrepreneurs availing loans for construction of hotels and hospitals to run these ventures themselves may be able to get them at cheaper interest rates as the Reserve Bank of India (RBI), in its draft guidelines on classification of exposures as commercial real estate exposures (CRE), said it would not classify the exposures as CRE.

If an exposure is not classified as CRE, then a bank can assign lower risk weight to its exposure, thereby easing the pressure on capital. However, loans extended to builders towards construction of housing buildings, hotels, hospitals, condominiums, shopping malls, office blocks, etc, meant for sale/leasing, would be classified as CRE exposure.

According to the RBI, if both the repayment and recovery of loan is primarily dependent upon either the level of real estate rentals or real estate prices, it will be classified as CRE exposure.

On the other hand, if the repayment 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 CRE even if the land and building are taken as collateral, and might be used in the recovery of the loan.

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