What changed
RBI observed that real estate companies have significant exposures to subsidiaries and group entities. It now advises banks to meticulously assess inherent group risk for real estate borrowal accounts and analyze financial viability on a consolidated basis, including unconsolidated related entities like SPVs.
What it means for you
Banks are encouraged to go beyond standalone borrower analysis for real estate loans, evaluating the entire group's financial health to avoid hidden risks from inter-company exposures. This may tighten underwriting standards for large builders and developers, potentially reducing lending to opaque group structures.
What you must do
- Consider reviewing all real estate loan accounts for group risk, including exposures to subsidiaries and SPVs.
- Consider requiring consolidated financial statements from large builders/developers before sanctioning or renewing loans.
- Consider analyzing financial viability of unconsolidated related entities like SPVs to assess overall group risk.
- Consider updating credit risk policies to incorporate group risk assessment for real estate sector exposures.
Who it affects
Commercial banks (excluding RRBs), Large builders and land developers (as borrowers), Credit risk and underwriting teams
What is 'group risk' in this context?
Group risk refers to the potential financial contagion from a borrower's exposures to its subsidiaries, group companies, or related entities, which could impact the borrower's repayment capacity.
Do we need consolidated accounts for all real estate borrowers?
The advisory specifically applies to large builders/land developers; for them, banks may analyze financial viability on a consolidated basis using group accounts.
What about SPVs that are not consolidated?
Banks may also examine the financial credentials and viability of unconsolidated related entities such as SPVs to capture all material risks.