RBI’s Lending Framework For REITs And InvITs: Draft Credit Facility Amendments And Ease Of Doing Business Measures For Banks

1. Why RBI Is Re Working Bank Lending To REITs And InvITs?

RBI published its Draft Second Amendment Directions 2026 to the "Commercial Banks - Credit Facilities" framework on February 2026 which introduces a systematized approach for banks to provide credit to Real Estate Investment Trusts (REITs) and establishes unified standards for Infrastructure Investment Trusts (InvITs). The RBI established this framework after it had previously prohibited banks from lending to REITs while it maintained separate operational restrictions on InvITs. The draft directions aim to open a new source of funding for these trusts while embedding prudential safeguards on eligibility, leverage, security and monitoring.

This article explains what banks will be allowed to do under the proposed framework, the conditions attached to lending to REITs and InvITs, and what this means for sponsors, investors and real estate/infrastructure borrowers.

2. What Has RBI Proposed For Bank Lending To REITs?

Permitting bank finance to listed REITs, with conditions

Historically, RBI barred banks from extending loans to REITs, even though they could invest in listed REIT units within prescribed exposure limits. The draft amendment directions now propose to permit commercial banks to lend to REITs registered with SEBI, subject to a detailed set of prudential safeguards, reflecting the regulator’s comfort with the governance and disclosure regime for listed REITs.

The framework will be implemented through amendments to the existing credit facilities directions which will enter into force on 1 July 2026 or earlier if banks adopt the norms ahead of time.

Eligibility criteria for REIT borrowers

Under the draft, banks may lend only to REITs that meet baseline eligibility conditions, including:

1. The REIT must be registered with SEBI and listed on a recognised stock exchange in India.
2. It must have completed a minimum of three years of operations, with positive net distributable cash flows (NDCF) for at least the preceding two financial years.
3. There should be no material adverse regulatory action or serious non compliance reported by SEBI or stock exchanges.

These conditions ensure that bank funding is restricted to seasoned, publicly regulated REITs with demonstrated cash flow generation rather than newly launched or speculative vehicles.

Prudential exposure limits and leverage caps

RBI proposes that bank exposure to REITs be subject to both entity level and system wide limits.

1. The aggregate credit exposure of all banks to a borrowing REIT and its underlying SPVs/holding companies together cannot exceed 49 percent of the value of the REIT’s assets, or a lower limit set by individual bank boards based on credit rating or risk appetite.
2. The overall leverage of the REIT must remain within the prudential ceiling prescribed by SEBI, and banks may choose to apply an even lower internal cap.

These caps are designed to prevent excessive bank leverage on REIT balance sheets and to ensure that the regulated capital market investor base continues to provide the primary risk capital.

Loan structuring, security and monitoring

The draft directions lay down detailed requirements on how banks structure and secure loans to REITs.

Form of lending: bank finance must be by way of term loans or similar facilities without bullet or ballooning principal repayments; amortisation profiles must support sustainable debt service coverage.

End use: borrowings must be used only for specified purposes such as acquisition of completed or revenue generating assets, refinancing of existing project debt, or capital expenditure for performance enhancement rather than speculative land banking or unrelated diversification.

Security: loans must be fully secured by way of a charge on identified assets. The same asset cannot be leveraged simultaneously at both REIT and SPV/holdco levels. Where a facility is extended at the REIT level against a specified asset, any existing loan at the SPV/holdco level in respect of that asset must be fully liquidated.

Cash flow controls: banks are expected to insist on escrow mechanisms and covenants around distribution waterfalls, so that NDCF is transparently captured and debt service comes ahead of discretionary distributions.

Banks must also put in place board approved policies on lending to REITs, covering appraisal standards, DSCR benchmarks, internal borrower and portfolio limits, and monitoring and covenant tracking processes.

3. How Are InvIT Lending Norms Being Harmonised?

Existing framework for InvITs and RBI’s rationale

Banks have, for some years, been permitted to lend to InvITs, subject to a prudential framework that focuses on leverage, SPV performance and legal enforcement of security. However, the conditions evolved piecemeal and differed in key respects from those applicable to REIT related exposures, leading to regulatory asymmetry between the two trust structures.

RBI now proposes to align the InvIT lending norms with the safeguards proposed for REITs, creating a more uniform regime across both real estate and infrastructure trusts. This is framed as part of a broader effort to make InvITs and REITs more effective vehicles for recycling capital from completed assets into new projects.

Updated conditions and exposure norms for InvIT lending

Under the draft amendments, banks will lend to InvITs only where several prudential conditions are met:

1. The InvIT must be SEBI registered and listed, with a minimum three year operating track record and positive NDCF in the preceding two years, mirroring the REIT conditions.
2. None of the underlying SPVs with existing bank loans should be in “financial difficulty”, a term linked to RBI’s stressed asset definitions; this is to avoid layering new leverage on already stressed project companies.
3. Combined leverage at the InvIT and SPV levels must remain within SEBI’s prudential ceiling (for example, 70 percent with enhanced disclosure), or a lower limit set by bank boards.
4. Aggregate bank exposure to an InvIT and its underlying SPVs/holdcos together cannot exceed 49 percent of InvIT asset value, subject to tighter internal caps where warranted.

As with REITs, banks must ensure that financing against a specified asset is extended either at the InvIT level or at the SPV/holdco level, but not at both simultaneously, and that any pre existing facility at another level is re paid in full if the asset is re financed at trust level.

Board policies, DSCR benchmarks and monitoring

RBI expects banks to document a dedicated InvIT lending policy, which should include:

1. Appraisal methodologies tailored to InvIT cash flow structures and concession arrangements.
2. Underwriting norms, including DSCR benchmarks, leverage thresholds and sensitivity analysis for traffic/revenue assumptions.
3. Borrower level and portfolio level exposure limits by rating, sponsor quality, sector and geography.
4. Monitoring mechanisms, including periodic review of SPV performance, covenant compliance and SEBI/regulatory disclosures.

This is intended to ensure that InvIT lending is treated as a distinct product line with specialised risk management, rather than as a simple extension of corporate or project finance.

4. How Does This Change The Landscape For Banks?

New asset class, but with tight risk controls

For commercial banks, the draft directions open up REITs as a new class of borrowers while re casting InvIT lending within a stricter, more standardised framework. The key implications include:

Diversification: REIT and InvIT loans offer exposure to operating, cash flow generating asset pools with regulated distribution policies, potentially diversifying project finance portfolios.

Risk concentration: Banks face restrictions on their operational capabilities because exposure caps together with leverage limits and asset security regulations prevent them from using leveraged financing on existing debt-backed SPVS. The banks need to assess their total risk exposure from both the trust and SPVs operations.

Process upgrades: new board policies, DSCR metrics, escrow and covenant monitoring structures will need to be built, often collaboratively between project finance, real estate, risk and legal teams.

Banks with existing exposure to InvIT backed projects will need to re map their portfolios against the proposed 49 percent cap and SEBI linked leverage ceilings to identify headroom or pressure points once the amendments take effect.

Legal and documentation considerations

Because REITs and InvITs are trust structures, not companies, banks must also consider legal enforceability of security interests, especially where assets are held through SPVs or concession agreements. Commentaries highlight the need for careful drafting of:

1. Security documents and trust level charges.
2. Intercreditor arrangements where multiple banks or AIFIs finance the same asset at different levels.
3. Cash flow escrow and distribution waterfall covenants that are consistent with SEBI regulations and disclosure obligations.

5. What Does This Mean For REIT/InvIT Sponsors And Investors?

Access to bank debt and capital recycling

For REITs and InvITs, RBI’s draft framework is part of a larger “enabling environment” being constructed through parallel SEBI proposals on borrowing and end use. Key benefits include:

1. Access to domestic bank credit, which can complement capital market borrowings and help optimise cost of capital.
2. Greater scope to refinance construction phase project loans at the trust level once assets stabilise, freeing up bank capital for new projects.
3. A more predictable, uniform lending regime across REITs and InvITs, improving comparability and investor confidence.

At the same time, sponsors must plan for tighter scrutiny of NDCF, leverage and SPV performance, and may face constraints on layering leverage at multiple levels of the structure.

Impact on unit holders and governance

The unit holders will experience better returns from bank debt access which they can use responsibly but this access will create higher financial risks. The combination of SEBI leverage caps and RBI bank exposure limits serves to maintain this risk at acceptable levels. The implementation of escrow accounts together with DSCR tests and covenants will result in stronger bank monitoring which enhances both asset selection governance and distribution policy governance.

6. Key Action Points And Open Questions

For banks

1. Conduct a portfolio review of existing InvIT exposures and sponsor relationships against the proposed leverage and 49 percent exposure caps.
2. Draft or update board approved policies on lending to REITs and InvITs, incorporating sector specific appraisal norms and DSCR benchmarks.
3. Work with legal teams to standardise documentation, security and escrow structures that comply with both RBI directions and SEBI REIT/InvIT regulations.

For REIT/InvIT managers and sponsors

1. Map how proposed bank borrowing fits into their capital structure strategy, considering SEBI leverage caps and rating implications.
2. Prepare data and processes to demonstrate NDCF stability, SPV performance and regulatory compliance to prospective lenders.
3. Re visit trust documents, financing arrangements and inter creditor terms to ensure compatibility with RBI’s security and end use requirements.

Open questions for the consultation process

Commentators have flagged some issues that may attract industry feedback:

1. Whether the three year track record and two year NDCF requirements are too restrictive for newly listed but robust REITs or InvITs.
2. How strictly the “no SPV in financial difficulty” condition will be applied, given that individual projects in a portfolio may face temporary stress while the overall trust remains sound.
3. The extent to which banks can rely on SEBI’s oversight and disclosures versus needing their own independent monitoring frameworks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.