Vinu: Manu, I’ve got a question. Can banks give a term loan to an SME just to buy a piece of commercial land?

Manu: That’s a good question, Vinu. Generally speaking, banks are not allowed to give loans just for the purchase of land, especially when it is intended to be held for future development or investment.

Vinu: Really? Even if the borrower is financially strong and has good credit history?

Manu: Yes, even then. The restriction is in place to prevent speculative land buying. The Reserve Bank of India has made it clear that banks should not lend purely for acquiring land, especially for commercial purposes, as it doesn’t lead to immediate productive activity.

Vinu: Hmm… so this rule is mainly for builders and real estate developers?

Manu: While the original focus was on private builders, most banks follow the same principle for all kinds of borrowers, including SMEs. If the loan is meant only for buying land, it’s usually not eligible for bank financing.

Vinu: Then in what case can a bank actually fund land purchase?

Manu: If the land purchase is part of a composite project—that is, the borrower is also constructing a factory, office space, or a commercial complex on that land—then banks may consider funding it. The key is that the land should not be the only purpose of the loan. There must be clear development activity involved.

Vinu: So, the proposal has to include both land and construction, with a clear project timeline?

Manu: Exactly. Banks will evaluate the project holistically, including the borrower’s plans, permissions, financials, and repayment capacity. If the project appears genuine and productive, they may provide a term loan.

Vinu: And I assume this kind of loan won’t be treated as priority sector lending?

Manu:  That’s right. Loans for purchasing land or constructing commercial complexes usually do not qualify under Priority Sector Lending, so the borrower won’t get those benefits.

Vinu: Got it. So, if someone approaches me asking for a loan to just buy land, I should inform them that it’s not allowed?

Manu: Yes, inform them clearly. But if they have a full development project—land purchase along with building plans—then you can ask them to prepare a detailed proposal and take it forward with proper approvals.

Vinu: Thanks, Manu. That makes things very clear!

Manu: Always happy to help, Vinu. Understanding these basics is key to credit assessment.