The Reserve Bank of India (RBI) has allowed banks to lend to Real Estate Investment Trusts (REITs), albeit with certain conditions.

Banks can lend to only listed REITs, running a minimum three years of operations, and having a positive net distributable cash flows in the preceding two financial years. 

The entity should also have been without any adverse regulatory action during the last three years, RBI said in its draft guidelines.

The RBI has proposed that the lending exposure to REITs cannot exceed 10% of the bank’s eligible capital base and the end use of funds should be strictly monitored. REITs are, for instance, not permitted to use it for land acquisitions, even when they form part of a project.

"A bank shall strictly monitor the end use of funds lent to REITs to ensure that this route is not being used to finance activities which are not permitted," the RBI said in its draft guidelines.

The aggregate credit exposure of lenders to the borrowing REIT and its underlying special purpose vehicles together should not exceed 49% of the value of its assets as on 31 March of the previous financial year.

A REIT is an entity that owns and operates income-generating real estate assets such as malls and offices. It pools money from investors, like mutual funds, to invest in properties and distributes the income as dividends.

There are five listed REITs in India - Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT, Nexus Select Trust and Knowledge Realty Trust.

Currently, banks provide credit to Infrastructure Investment Trusts (InvITs), which are similar to REITs.

Last week, the RBI in its monetary policy review proposed to permit commercial banks to extend finance to REITs.

The RBI has now issued a draft circular seeking comments until 6 March before finalising the guidelines, which will come into effect from July.