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The Reserve Bank of India (RBI) introduced a major regulatory shift on Friday, which enables banks to provide loans directly to Real Estate Investment Trusts (REITs) to enhance financial access and improve credit distribution for the real estate market.

After the Monetary Policy Committee (MPC) meeting concluded, RBI Governor Sanjay Malhotra said, "To further promote financing to the real estate sector, it is proposed to allow banks to lend to REITs with certain prudential safeguards."

He explained that the proposal will assist the sector through controlled methods which maintain financial stability.

The existing system prevents banks from making direct loans to REIT entities because they can only finance special purpose vehicles (SPVs), which operate individual real estate holdings. The proposed change will create a major transformation of the current rules which govern real estate financing operations.

The Central Bank plans to enable banks to lend directly to REITs because this will provide more funding solutions for these investment vehicles that direct capital into established real estate assets, which produce income.

RBI’s decision to allow direct bank lending to REITs has been widely welcomed by industry leaders, who believe the move will unlock a new funding channel, improve liquidity in the real estate sector, and help reduce borrowing costs for REITs compared to market-based financing options.

Shishir Baijal, International Partner, Chairman and Managing Director of Knight Frank India, noted that the repo rate continues to remain at one of its lowest levels in the post-pandemic period. He added that alongside the rate stance, the central bank’s move to ease lending norms for REITs is a positive step that will improve credit access and enable these trusts to tap lower-cost funds.

CREDAI President Shekhar G Patel highlighted that maintaining the repo rate at 5.25 per cent offers much-needed policy stability at a time of global currency volatility. According to him, predictability in financing costs is crucial for sustaining demand and maintaining investment confidence in the real estate sector.

Commenting on the momentum in smaller cities, NAREDCO President Parveen Jain said that with the government’s focus on developing cities with populations above five lakh in the Union Budget, stable interest rates could significantly support growth in Tier 2 and Tier 3 markets.

However, reactions were mixed when it came to the affordable housing segment. Anuj Puri, Chairman of ANAROCK Group, observed that while existing borrowers will benefit from stable EMIs, the decision is unlikely to spur fresh demand or improve affordability. He pointed out that many prospective homebuyers are holding back in anticipation of lower rates, adding that a rate cut could have encouraged some buyers to re-enter the market.

Baijal also noted that although a further rate cut would have strengthened homebuyer sentiment, banks are expected to pass on more of the current rate benefits to consumers in the coming months.

Meanwhile, Anshuman Magazine expressed optimism about the outlook for REITs, stating that the segment is poised for strong growth in the coming months following the RBI’s regulatory easing.

While the RBI has not yet outlined the detailed framework or prudential safeguards under which such lending will be allowed, the proposal is expected to strengthen the overall real estate financing ecosystem and support long-term sector growth.

With ANI inputs