India’s real estate investment ecosystem is set for a structural shift following a central bank proposal that would allow scheduled banks to directly lend to Real Estate Investment Trusts (REITs), a move expected to deepen capital access for income-generating property assets while expanding credit opportunities for lenders.
The proposal, outlined by the country’s monetary authority this week, removes a long-standing regulatory distinction that permitted bank lending to real estate companies but excluded trusts from direct borrowing. Under the revised approach, REITs would be treated on par with other recognised investment vehicles, similar to Infrastructure Investment Trusts, which already have access to bank credit. For the property sector, the change could significantly lower the cost of capital for stabilised commercial assets such as offices, retail centres, and logistics parks. REITs, which are mandated to distribute the majority of their income to unit holders, have largely relied on bond markets and institutional investors for debt. Direct bank lending could introduce more flexible financing structures and improve refinancing options, particularly in a rising interest rate environment. Banking sector analysts say the move reflects a maturing view of real estate-linked financial instruments. Rather than being seen purely as speculative property exposure, REITs are increasingly recognised as cash-flow-backed entities with predictable rental income and regulated governance standards. For banks, this creates an opportunity to deploy capital into lower-risk real estate assets without increasing exposure to construction-stage development.
The announcement also comes against the backdrop of active liquidity management by the central bank. Officials reiterated that ensuring adequate system liquidity remains a continuous responsibility, with tools such as open market operations and variable rate auctions being deployed to smoothen transmission across markets. Observers note that stable liquidity conditions are essential if banks are to support long-duration assets like commercial real estate without distorting the yield curve. Beyond real estate, the central bank also flagged broader credit policy adjustments aimed at improving financial inclusion. The limit for collateral-free loans to micro and small enterprises has been revised upward to reflect inflation and changing business realities. This is expected to benefit smaller urban enterprises, including service providers and home-based businesses that form a critical layer of city economies. On government borrowing, policymakers indicated that net issuance figures and treasury bill management would play a larger role in maintaining market stability, rather than focusing solely on headline borrowing numbers. This approach is intended to reduce volatility in bond markets and support long-term infrastructure and housing finance. From an urban development perspective, enabling REITs to access bank funding could accelerate investment in professionally managed commercial buildings, which are typically more energy-efficient and compliant with modern safety and environmental standards.
However, planners caution that credit expansion must be accompanied by strong oversight to prevent excessive leverage in high-value property markets. As India’s cities increasingly rely on institutional capital to fund offices, transit-linked retail, and mixed-use districts, the success of this policy shift will depend on how prudently banks and trusts balance growth with financial resilience.
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