Govt homes in on heads for 3 institutions

Govt homes in on heads for 3 institutions

UCO Bank Chairman and Managing Director SK Goel is set to take over as the new chairman of India Infrastructure Finance Company (IIFCL).

Sources close to the development said the appointment of Goel, whose term at the Kolkata-headquartered bank was due to end in a couple of months, had been approved by the government and a notification was expected shortly.

He will replace SS Kohli, whose extended term at the infrastructure finance company came to an end last month. The financial institution’s Executive Director Pradeep Kumar is currently officiating as the chairman and managing director.

The sources also said at least two other appointments were being finalised by the government. RV Verma, executive director at National Housing Bank, is the frontrunner for the post of chairman at the refinance and housing finance regulatory agency.

The government has started the process of appointment afresh due to problems in the first round. For a year, Central Bank of India Chairman and Managing Director S Sridhar has been officiating as NHB chairman.

In addition, sources said a notification regarding the appointment of IDBI Bank Chairman and Managing Director Yogesh Agarwal as the pension regulator was expected soon. Agarwal’s appointment has been approved by the government.

The sources said that SC Gupta, the former chairman and managing director of United Bank of India was set to move to the Board for Industrial and Financial Reconstruction as a member. Canara Bank Chairman and Managing Director AC Mahajan, who also retires this year, is likely to be appointed as a vigilance commissioner. Of the two vigilance commissioners, one post is reserved for a former banker.

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UCO Bank Q4 earnings soar 3.70 times

UCO Bank Q4 earnings soar 3.70 times

Public Sector lender, UCO Bank (Q,N,C,F)* has announced a rise of 3.70 times in the net profit for the quarter ended March 31, 2010. The net profit of the company was at Rs 3,798 million for the quarter as compared to Rs 1,025.60 million as compared to prior year period. Total income of the company was at Rs 26,900, a rise of 6.72% over the prior year period.

Shares of the company declined Rs 0.8, or 1.14%, to settle at Rs 69.20. The total volume of shares traded was 2,399,012 at the BSE (Friday).

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Govt go-ahead for mobile banking

Govt go-ahead for mobile banking

New Delhi: Mobile banking is set to be a reality now. A committee of secretaries, under the chairmanship of cabinet secretary K M Chandrasekhar, has given a go-ahead to the proposal by accepting the report of the inter-ministerial group (IMG).

With wireless subscriber numbers in India crossing the 575 million mark and growing by 18-19 million every month, the government wants to empower the masses as far as financial service delivery is concerned.

The IMG was constituted in November 2009, with top representatives from the Department of Information Technology (DIT), Ministry of Finance, Department of Posts, Department of Telecom, Ministry of Rural Development, Planning Commission, Home Ministry and Reserve Bank of India. The group had finalised its report last month.

“With mobile subscribers in rural areas far outstripping bank account holders, a large section of rural population now has access to mobile telephony but not to financial services,” according to a statement by the IMG.

A system that enables provision of basic financial services through an individual’s mobile could be a major step in the direction of reaching out to the unbanked sections of the country, it added.
According to the IMG report, the members reached an agreement on the basic goals for delivery of financial services using mobile phones.

The IMG framework “envisages creation of mobile linked no-frills accounts” by banks, which will have various transaction limits. The basic financial transactions on these accounts, including cash deposit, cash withdrawal, peer to peer transfer and balance inquiry, can be executed through a mobile based PIN system.

RBI guidelines on outsourcing of financial services by banks permit banks to outsource data processing and back office related activities. “The sharing of IT infrastructure for account maintenance for scaling up operations as envisaged above would be in line with such permissible outsourcing arrangements and should also facilitate inter-bank settlement. However, this would be subject to the banks adhering to extant outsourcing guidelines and the RBI guidelines on customer data confidentiality,” according to the IMG report.

Around 51.4% of the nearly 89.3 million farmer households do not have access to any credit either from institutional or non institutional sources, as per the National Sample Survey.

The survey has shown that only 27% of farm households are indebted to formal sources. Also, only 13% are availing loans from the banks in the income bracket of less than Rs 50,000. Not only that, a large percentage of rural population does not have a deposit account.

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Govt to review bank CMD selection process

Govt to review bank CMD selection process

The finance ministry will review the selection process for the posts of chairman and managing director (CMD) of eight public sector banks (PSBs) following complaints from some Members of Parliament (MPs). The appointments may be delayed now.

The finance ministry conducted interviews earlier this year and prepared a list of candidates. Eleven top posts in public sector banks will fall vacant in 2010. Two posts have already been filled with candidates selected last year.

MPs have now raised questions over the transparency of the process and alleged that certain norms were flouted during the selection this year.

Law makers argued that relaxations in eligibility criteria were made regarding the number of years in service as executive director (ED) and years of residual service, without obtaining an approval of the cabinet appointments committee.

“There has been a lot of ad hoc selection. Initially, even managing directors of associate banks of State Bank of India were called for the interview, but were dropped later. Candidates with less than one year and nine months of service were included for the interview at the last minute. All these point to the pressure exerted on the department of financial services (a department in the ministry of finance) to favour certain candidates,” the MPs said in a letter to the government.

In response, the finance ministry said it would now look into the allegations.

For the post of chairman and managing director in government-owned banks, candidates completing a minimum of two years as ED and two years of residual service are eligible. In case of the lack of eligible candidates, the criteria for minimum residual service could be reduced to one year nine months. However, any further relaxation would require approval of the appointment committee.

“Candidates who have completed less than one year of service (as ED) have been placed above the candidates who fulfill the eligibility criteria without any relaxation. Similarly, candidates who have residual service of less than one year and nine months have been placed above the candidates who meet all the criteria,” the letter said.

Top slots in Punjab Sind Bank, Corporation Bank, Canara Bank, Andhra Bank, Bank of Maharashtra, UCO Bank, Indian Overseas Bank and Oriental Bank of Commerce will fall vacant in 2010. In addition, the post of chairman and managing director in IDBI Bank will also fall vacant, but the position is likely to be filled by a candidate selected during the last years’ interview

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Banks post big gains, but run may not last long

Banks post big gains, but run may not last long
Mumbai: Large private banks have posted healthy profits for the three months to 31 March, but their public sector peers reported mixed results, indicating, say analysts, that times could turn tough as interest rates rise amid limited upside to credit growth.

The country’s largest private sector lender, ICICI Bank Ltd, posted a 35% year-on-year increase in net profit to Rs1,006 crore for the quarter. HDFC Bank Ltd and Axis Bank Ltd saw net profit rise by 32.6% and 31.5% for the quarter, respectively.

Profit jumped on the back of growth in loans and income from the sale of retail and treasury products as well as measures to cut costs.

Among public sector banks, Bank of Baroda, Mangalore-based Corporation Bank and Hyderabad-based Andhra Bank clocked profit growth of about 20% each. Delhi-based Oriental Bank of Commerce’s net profit growth was a much higher 60%.

But Canara Bank, India’s sixth largest lender, saw profit dropping by 30%. Allahabad Bank’s profit fell by 15% and that of Indian Overseas Bank by 60%.

In all cases, banks booked higher provisions partly due to increasing stress in restructured assets and also because of a Reserve Bank of India (RBI) norm requiring provision coverage of 70% of banks’ bad debts. Treasury income in all cases was muted owing to the hardening of bond yields.

The future may not be all that promising in terms of profitability as treasury gains are expected to decline with a rise in interest rates, analysts said.

When rates go up, the bond holdings of banks depreciate and they need to make good the shortfall by making provisions. Under banking norms, they are required to invest 25% of their deposits in government bonds.

“Despite buoyant loan demand, overall outperformance looks unlikely” as rates are rising due to macro pressures and not loan growth, said a recent research report by Citigroup Global Markets Inc.

Citigroup expects a 2.75 percentage point hike in policy rates over two years.

“Typically, banks’ underperformance has come during periods of rising interest rates due to macro factors and not so much due to an increase in credit growth,” it said.

Keefe, Bruyette and Woods Inc., a financial services specialist, said in another report that the risk to the Indian banking sector includes higher-than-expected inflation and bond yields.

“We estimate earnings would decline by an average of 8% were the bond yield to increase to 9%. We believe State Bank of India (SBI) is most exposed to this risk, due to the relatively long-term duration of its bond portfolio. HDFC Bank, with a small fixed-income portfolio, is the least exposed to bond losses,” said the report.

According to the report, SBI, the country’s largest bank, has the longest duration bond portfolio. This puts SBI more at risk from a spike in bond yields than its peers. “We estimate that a spike in the benchmark 10-year bond yield to 9% could take about 17% off the bank’s earnings,” it said.

The yield on the benchmark 10-year bond is now around 8.07%. SBI will announce fourth-quarter earnings on 14 May.

Credit growth expanded steadily during the second half of the last fiscal from its intra-year low of 10.3% in October to 16.9% by March, signalling economic revival and growing corporate confidence in fresh investment for capacity expansion. RBI has pegged credit and deposit growth at 20% and 18%, respectively.

In its annual monetary policy, RBI pegged the growth forecast for 2010-11 at 8% with an upward bias and increased key policy rates by 0.25 percentage point to tame inflationary expectations, sustain economic growth momentum and accommodate the government’s borrowing plan.

Citigroup said in its report that short-term liquidity in the banking system has been declining steadily over the last couple of years and is currently the lowest in six years.

“With Reserve Bank of India continuing to drain liquidity in the form of higher reserve requirements, risks to a tighter liquidity environment cannot be ruled out, especially if credit growth rises to a stronger pace,” added the report.

Aditi Thapliyal, banking analyst at UK-based investment banking firm Execution Noble and Co. Ltd, said the incremental credit pick-up was still modest, so banks would be reluctant to hike rates in a hurry. This could have an impact on the net interest margin, she said.

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Know Your Customer (KYC) Norms/ Anti- Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)

Know Your Customer (KYC) Norms/ Anti- Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT)

RBI/2009-10/439
DNBS(PD).CC. No. 172/03.10.42 /2009-10

April 30, 2010

All Non Banking Financial Companies /
Residuary Non Banking Companies

Dear Sir,

Know Your Customer (KYC) Norms/ Anti- Money Laundering (AML) Standards/
Combating of Financing of Terrorism (CFT)

Please refer to Company Circular No 166 dated December 2, 2009 on the captioned subject. Financial Action Task Force (FATF) has issued a Statement dated February 18, 2010 on the subject (Copy enclosed) which divides the strategic AML/CFT deficient jurisdictions into three groups as under:

(i) Jurisdictions subject to FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/FT) risks emanating from the jurisdiction: Iran

(ii) Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of February 2010. The FAFT calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction: Angola, Democratic People's Republic of Korea (DPRK), Ecuador and Ethiopia.

(iii) Jurisdictions previously publicly identified by the FAFT as having strategic AML/CFT deficiencies, which remain to be addressed as of February 2010: Pakistan, Turkmenistan, Sao Tome and Principe

2. All NBFCs/RNBCs are accordingly advised to take into account risks arising from the deficiencies in AML/CFT regime of these countries.

3. An acknowledged receipt of this circular may be submitted by the Compliance officer/ Principal Officer of the NBFCs to the concerned Regional Office of DNBS in whose jurisdiction the NBFC/RNBC is functioning.


Yours faithfully,

(Uma Subramaniam)
Chief General Manager-in-Charge

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Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances - Projects under Implementation

Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances - Projects under Implementation

RBI/2009-10/424
UBD.BPD.PCB.Cir.No. 59 /09.14.000 / 2009-10

April 23, 2010

The Chief Executive Officer
All Primary (Urban) Cooperative Banks

Dear Sir,

Prudential Norms on Income Recognition, Asset Classification and
Provisioning Pertaining to Advances - Projects under Implementation

'Project Loan' would mean any term loan which has been extended for the purpose of setting up of an economic venture. Banks must fix a Date of Commencement of Commercial Operations (DCCO) for all project loans at the time of sanction of the loan / financial closure* (in the case of multiple banking or consortium arrangements). For the purpose of IRAC norms, all project loans may be divided into the following two categories; (i) Project Loans for infrastructure sector (ii) Project Loans for non-infrastructure sector

2. Guidelines on Asset Classification of Projects under Implementation

2.1 Project Loans for Infrastructure Sector

2.1.1 A loan for an infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.1.3 to 2.1.5 below.

2.1.2 A loan for an infrastructure project will be classified as NPA if it fails to commence commercial operations within two years from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.1.3 to 2.1.5 below.

2.1.3 There may be occasions when completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring / rescheduling of loans by banks. If a project loan classified as 'standard asset' is restructured any time during the period up to two years from the original date of commencement of commercial operations (DCCO), in accordance with the instructions contained in our circular UBD.PCB.BPD.No. 53 / 13.05.000 / 2008-09 dated March 6, 2009 on prudential guidelines on restructuring of advances, it can be retained as a standard asset if the fresh DCCO is fixed within the following limits, and further provided the account continues to be serviced as per the restructured terms:

(a) Infrastructure Projects involving court cases

Up to another 2 years (beyond the existing extended period of 2 years i.e total extension of 4 years), in case the reason for extension of date of commencement of production is arbitration proceedings or a court case.

(b) Infrastructure Projects delayed for other reasons beyond the control of promoters

Up to another 1 year (beyond the existing extended period of 2 years i.e. total extension of 3 years), in other than court cases.

2.1.4 The dispensation in para 2.1.3 is subject to the condition that the application for restructuring should be received before the expiry of period of two years from the original DCCO and when the account is still standard as per record of recovery. The other conditions applicable would be :

In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond two years from the original DCCO, considering the high risk involved in such restructured accounts.

Banks should maintain provisions on such accounts as long as these are classified as standard assets as under :

Until two years from the original DCCO 0.40%

During the third and the fourth years after the original DCCO.
1.00%


2.1.5 For the purpose of these guidelines, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same.

2.2 Project Loans for Non-Infrastructure Sector

2.2.1 A loan for a non-infrastructure project will be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.2.3 to 2.2.5 below.

2.2.2. A loan for a non-infrastructure project will be classified as NPA if it fails to commence commercial operations within six months from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras 2.2.3 to 2.2.4 below.

2.2.3 In case of non-infrastructure projects, if the delay in commencement of commercial operations extends beyond the period of six months from the date of completion as determined at the time of financial closure, banks can prescribe a fresh DCCO, and retain the "standard" classification by undertaking restructuring of accounts in accordance with the provisions contained in our circular dated March 6, 2009, provided the fresh DCCO does not extend beyond a period of twelve months from the original DCCO. This would among others also imply that the restructuring application is received before the expiry of six months from the original DCCO, and when the account is still "standard" as per the record of recovery.

The other conditions applicable would be :

In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond six months from the original DCCO, considering the high risk involved in such restructured accounts.

Banks should maintain provisions on such accounts as long as these are classified as standard assets as under :

Until the first six months from the original DCCO 0.40%

During the next six months
1.00%


2.2.4 For this purpose, mere extension of DCCO will also be treated as restructuring even if all other terms and conditions remain the same.

2.3. These guidelines will however not be applicable to restructuring of advances referred to in para 7.1.3 of circular dated March 6, 2009 viz., commercial real estate and housing loans.

2.4 Other Issues

2.4.1 All other aspects of restructuring of project loans before commencement of commercial operations would be governed by the provisions of our circular dated March 6, 2009. Restructuring of project loans after commencement of commercial operations will also be governed by these instructions.

2.4.2 Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if :

(i) The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.

(ii) The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay.

(iii) The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCP.

(iv) On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch.

3. The definition of infrastructure lending and exposure to commercial real estate are given Annex 1 II respectively.

4. Please acknowledge receipt to the Regional Office concerned.

Yours faithfully

(A.K. Khound)
Chief General Manager

* For greenfield projects, financial closure is defined as a legally binding commitment of equity holders and debt financiers to provide or mobilise funding for the project. Such funding must account for a significant part of the project cost which should not be less than 90 per cent of the total project cost securing the construction of the facility.


--------------------------------------------------------------------------------
Annex 1

Definition of 'Infrastructure Lending'



Any credit facility in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an infrastructure facility as specified below falls within the definition of "infrastructure lending". In other words, a credit facility provided to a borrower company engaged in


*
developing or


*
operating and maintaining, or


*
developing, operating and maintaining any infrastructure facility that is a project in any of the following sectors, or any infrastructure facility of a similar nature :



i.
a road, including toll road, a bridge or a rail system;



ii.
a highway project including other activities being an integral part of the highway project;



iii.
a port, airport, inland waterway or inland port;



iv.
a water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system;



v.
telecommunication services whether basic or cellular, including radio paging, domestic satellite service (i.e., a satellite owned and operated by an Indian company for providing telecommunication service), network of trunking, broadband network and internet services;



vi.
An industrial park or Special Economic Zone;



vii.
generation or generation and distribution of power;



viii.
transmission or distribution of power by laying a network of new transmission or distribution lines;



ix.
construction relating to projects involving agro-processing and supply of inputs to agriculture;



x.
construction for preservation and storage of processed agro-products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality;



xi.
construction of educational institutions and hospitals;



xii.
laying down and / or maintenance of gas, crude oil and petroleum pipelines.



xiii.
any other infrastructure facility of similar nature.


--------------------------------------------------------------------------------

Annex 2

Definition of Commercial Real Estate Exposure (CRE)

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

"Income-producing real estate (IPRE) refers to a method of providing funding to real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, and hotels) where the prospects for repayment and recovery on the exposure depend primarily on the cash flows generated by the asset. The primary source of these cash flows would generally be lease or rental payments or the sale of the asset. The borrower may be, but is not required to be, an SPE (Special Purpose Entity), an operating company focused on real estate construction or holdings, or an operating company with sources of revenue other than real estate. The distinguishing characteristic of IPRE versus other corporate exposures that are collateralised by real estate is the strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property".

2. The Income Producing Real Estate (IPRE) is synonymous with Commercial Real Estate (CRE). 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.

3. In 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, corporate loans extended to real estate companies etc.

4. It follows from the definition at para 2 and 3 above 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.

5. UCBs should not extend finance for acquisition of land even if it is part of a project. However, finance can be granted to individuals for purchase of a plot, provided a declaration is obtained from the borrower that he intends to construct a house on the said plot, within such period as may be laid down by the banks themselves.

Simultaneous Classification of CRE into other Regulatory Categories

6. It is possible for an exposure to get classified simultaneously into more than one category, real estate, CRE, infrastructure etc as different classifications are driven by different considerations. In such cases, the exposure would be reckoned for regulatory / prudential exposure limit, if any, fixed by RBI or by the bank itself, for all the categories to which the exposure is assigned. For the purpose of capital adequacy, the largest of the risk weights applicable among all the categories would be applicable for the exposure. The rationale for such an approach is that, while at times certain classifications / categorizations could be driven by socio-economic considerations and may be aimed at encouraging flow of credit towards certain activities, these exposures should be subjected to appropriate risk management / prudential / capital adequacy norms so as to address the risk inherent in them. Similarly, if an exposure has sensitivity to more than one risk factor it should be subjected to the risk management framework applicable to all the relevant risk factors.

7. In order to assist banks in determining as to whether a particular exposure should be classified as CRE or not, some examples based on the principles described above are given below. Based on the above principles and illustrations given, banks should be able to determine, whether an exposure not included in the illustrative examples is a CRE or not and should record a reasoned note justifying the classification.

Illustrative Examples

A. Exposures which should be classified as CRE

1. Loans extended to builders for construction of any property which is intended to be sold or given on lease (e.g. loans extended to builders for housing buildings, hotels, restaurants, gymnasiums, hospitals, condominiums, shopping malls, office blocks, theatres, amusement parks, cold storages, warehouses, educational institutions , industrial parks) In such cases, the source of repayment in normal course would be the cash flows generated by the sale / lease rentals of the property. In case of default of the loan, the recovery will also be made from sale of the property if the exposure is secured by these assets as would generally be the case.

2. Loans for Multiple Houses intended to be rented out

The housing loans extended in cases where houses are rented out need to be treated differently. If the total number of such units is more than two, the exposure for the third unit onwards may be treated as CRE Exposure as the borrower may be renting these housing units and the rental income would be the primary source of repayment.

3. Loans for integrated Township Projects

Where the CRE is part of a big project which has small non-CRE component, it will be classified as CRE exposure since the primary source of repayment for such exposures would be the sale proceeds of buildings meant for sale.

4. Exposures to Real Estate Companies

In some cases exposure to real estate companies is not directly linked to the creation or acquisition of CRE, but the repayment would come from the cash flows generated by Commercial Real Estate. Such exposures illustratively could be :

Corporate Loans extended to these companies
Investments made in the debt instruments of these companies
Extension of guarantees on behalf of these companies
5. General Purpose loans where repayment is dependent on real estate prices
Exposures intended to be repaid out of rentals / sale proceeds generated by the existing CRE owned by the borrower, where the finance may have been extended for a general purpose.

B. Exposures which may not be classified as CRE

1. Exposures to entrepreneurs for acquiring real estate for the purpose of their carrying on business activities, which would be serviced out of the cash flows generated by those business activities. The exposure could be secured by the real estate where the activity is carried out, as would generally be the case, or could even be unsecured.

(a) Loans extended for construction of a cinema theatre, establishment of an amusement park, hotels and hospitals, cold storages, warehouses, educational institutions, running haircutting saloons and beauty parlours, restaurant, gymnasium etc. to those entrepreneurs who themselves run these ventures would fall in this category. Such loans would generally be secured by these properties.

For instance, in the case of hotels and hospitals, the source of repayment in normal course would be the cash flows generated by the services rendered by the hotel and hospital. In the case of a hotel, the cash flows would be mainly sensitive to the factors influencing the flow of tourism, not directly to the fluctuations in the real estate prices. In the case of a hospital, the cash flows in normal course would be sensitive to the quality of doctors and other diagnostic services provided by the hospital. In these cases, the source of repayment might also depend to some extent upon the real estate prices to the extent the fluctuation in prices influence the room rents, but it will be a minor factor in determining the overall cash flows. In these cases, however, the recovery in case of default, if the exposure is secured by the Commercial Real Estate, would depend upon the sale price of the hotel / hospital as well as upon the maintenance and quality of equipment and furnishings.

The above principle will also be applicable in the cases where the developers / owners of the real estate assets (hotels, hospitals, warehouses, etc.) lease out the assets on revenue sharing or profit sharing arrangement and the repayment of exposure depends upon the cash flows generated by the services rendered, instead of fixed lease rentals.

(b) Loans extended to entrepreneurs, for setting up industrial units will also fall in this category. In such cases, the repayment would be made from the cash flows generated by the industrial unit from sale of the material produced which would mainly depend upon demand and supply factors. The recovery in case of default may partly depend upon the sale of land and building if secured by these assets. Thus, it may be seen that in these cases the real estate prices do not affect repayment though recovery of the loan could partly be from sale of real estate.

2. Loans extended to a company for a specific purpose, not linked to a real estate activity, which is engaged in mixed activities including real estate activity. For instance, a company has two divisions. One division is engaged in real estate activity, and other division is engaged in power production. An infrastructure loan, for setting up of a power plant extended to such a company, to be repaid by the sale of electricity would not be classified as CRE. The exposure may or may not be secured by plant and machinery

3. Loans extended against the Security of future rent receivables

A few banks have formulated schemes where the owners of existing real estate such as shopping malls, office premises, etc. have been offered finance to be repaid out of the rentals generated by these properties. Even though such exposures do not result in funding / acquisition of commercial real estate, the repayment might be sensitive to fall in real estate rentals and such exposures should be classified as CRE. However, if there are certain in built safety conditions which have the effect of delinking the repayments from real estate price volatility like, the lease rental agreement between the lessor and lessee has a lock in period which is not shorter than the tenor of loan and there is no clause which allows a downward revision in the rentals during the period covered by the loan banks can classify such exposures as non CRE. Banks may, however, record a reasoned note in all such cases.

4. Credit facilities provided to construction companies which work as Contractors

The working capital facilities extended to construction companies working as contractors, rather than builders, will not be treated as CRE exposures because the repayment would depend upon the contractual payments received in accordance with the progress in completion of work.

5. Financing of acquisition / renovation of self-owned office / company premises

Such exposures will not be treated as CRE exposures because the repayment will come from company revenues. The exposures to industrial units towards setting up of units or projects and working capital requirement, etc. would not be treated as CRE Exposures.

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