RBI issues draft guidelines on infrastructure finance

The Reserve Bank of India (RBI) has proposed to overhaul rules governing project lending to enable the flow of funds to infrastructure and, at the same time, ensure that the risk metrics are under control. It has stipulated minimum exposure of banks in consortium lending and prescribed norms to defile credit events.

The regulator issued draft guidelines pertaining to the prudential framework for financing projects in the infrastructure, non-infrastructure and commercial real estate sectors. It said the guidelines lay down the regulatory dispensations regarding the date of commencement of commercial operations (DCCO) of such projects.

In the case of projects financed under consortium arrangements, where the aggregate exposure borrowing is up to Rs 1,500 crore, each lender should have a minimum exposure of 10%. If the aggregate exposure is more than Rs 1,500 crore, individual exposure should not be less than 5% or Rs 150 crore, whichever is higher. However, after the DCCO, lenders may acquire from or sell exposures to other lenders – new or existing – in the multiple banking or consortium arrangements.

In its draft guidelines, the RBI discouraged banks from designing finance agreements that allow a moratorium on repayments beyond the DCCO. The repayment structure should factor in lower initial cash flows, it said. However, if lenders decide to grant a moratorium on repayment beyond the DCCO, the moratorium cannot exceed six months from the commencement of commercial operations.

The RBI also proposed that the original or revised repayment tenor, including the moratorium period, if any, should not exceed 85% of the economic life of the project.

The dispensations under this framework shall be available only to those lenders who have extended finance to such project loans based on a common agreement between the debtor and the lenders, the RBI said.

For infrastructure projects under the public-private partnership (PPP) model, lenders can consider 50% or more land availability sufficient to achieve financial closure, said the draft guidelines.

The RBI also said that lenders should ensure that disbursal is proportional to the stages of completion of the project as well as to the progress in equity infusion by the promoter.

A positive net present value (NPV) is a prerequisite for any project financed by lenders, said the draft guidelines. Any subsequent diminution in NPV during the construction phase, either due to changes in projected cash flows, project life-period or any other relevant factor which may lead to credit impairment, shall be construed as a credit event. The RBI asked lenders to undertake revaluation of the project NPV independently every year.