RBI bars NBFCs from real estate speculation

Real estate news By Time News Network
Friday, Feb 23, 2007 03:37:42 AM

MUMBAI: After making it difficult for banks to lend to real estate, the Reserve Bank of India (RBI) has placed restrictions on finance companies investing in real estate. On Thursday, RBI came out with new norms for finance companies that bar them from speculating in property and enable RBI to monitor their capital market exposure on a monthly basis. The central bank has recast its rule book for finance companies by coming out with two sets of regulations — one for finance companies that deposits
and another for those not availing of public deposits.

The guidelines seek to distinguish asset finance companies and loan and investment companies among deposit-taking NBFCs. The new norms state that no finance company, which is accepting public deposits, can invest more than 10% of its networth in land or property except for its own use. At the same time, investment in unquoted shares of a company that is not a subsidiary has to be limited to 10% of networth. Loan and investment companies are, however, allowed to invest up to 20% of their networth in unquoted shares.

Existing guidelines require asset finance companies to ensure that 60% of their loans go to lease and hire-purchase of machinery. Several finance companies have been using the balance 40% to fund real estate sector. If a finance company acquires land or property or unquoted shares in exchange of its bad loans, these assets have to be disposed off by the NBFC within three years.

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