BT Explainer: RBI tightens lending norms for REITs -- what has changed and why does it matter?

The Reserve Bank of India (RBI) has unveiled a new framework governing bank lending to Real Estate Investment Trusts (REITs), tightening risk controls while providing greater clarity for lenders and investors.

The revised rules, part of the RBI's Third Amendment Directions, 2026, will come into force from October 1, 2026, and are aimed at ensuring financial stability as India's REIT market continues to expand.

What are REITs?

REITs are investment vehicles that own and manage income-generating real estate assets such as office parks, malls and warehouses. They allow investors to participate in real estate without directly purchasing properties.

India currently has several listed REITs, and the segment has emerged as an important avenue for monetising commercial real estate assets.

What has the RBI changed?

The central bank has laid down detailed rules governing how banks can lend to REITs.

Banks will now be permitted to lend only to REITs that are registered with the Securities and Exchange Board of India (SEBI) and listed on recognised stock exchanges.

In addition, lenders will have to frame board-approved policies covering credit appraisal, underwriting standards, debt service coverage ratio (DSCR) benchmarks, exposure limits and risk-monitoring mechanisms.

Which REITs can receive bank loans?

The RBI has restricted lending to REITs with predominantly income-generating assets.

Under the new rules, at least 80% of a REIT's portfolio must comprise completed assets that have generated positive operating cash flows for at least one year.

This aligns lending with the underlying business model of REITs, which are designed to hold stable, revenue-generating properties.

Why is RBI focusing on the end-use of funds?

The regulator has directed banks to closely monitor how borrowed funds are used.

The objective is to ensure that borrowings are deployed only for permitted purposes and are not diverted to stressed entities.

Banks must also ensure that legal structures do not weaken their ability to enforce security interests or exercise lender rights.

What restrictions have been imposed on stressed projects?

The RBI has barred the use of REIT borrowings to support special purpose vehicles (SPVs) that are already indebted to regulated entities and are under financial stress.

Refinancing of existing SPV loans will be allowed only for completed projects that have obtained completion or occupancy certificates.

The measure is aimed at preventing financially weak projects from being indirectly funded through REIT structures.

What is the new exposure cap?

To reduce concentration risks, the RBI has capped aggregate exposure of banks to a REIT and its underlying SPVs or holding companies at 49% of the value of the REIT's assets.

Banks have also been asked to independently assess whether cash flows are adequate to ensure timely repayment of debt.

Are loans required to be secured?

Yes.

The RBI has made it mandatory for all loans extended to REITs to be fully secured.

Collateral may include charges over underlying properties, assignment of rental receivables and cash flows, and pledges of equity stakes in SPVs.

Loan agreements must also incorporate safeguards such as escrow mechanisms and restrictions on additional borrowing without lenders' consent.

Why does this matter?

The new framework seeks to strike a balance between facilitating credit to India's growing REIT sector and protecting the banking system from excessive risk.

By linking lending to cash-generating assets, imposing exposure caps and mandating full security, the RBI aims to strengthen the quality of bank credit while giving investors and lenders greater clarity on how REIT financing should operate.