The Indian central bank on Friday has allowed banks and non-banking financial companies (NBFCs) to sponsor Infrastructure Debt Funds (IDFs) that can be formed as mutual funds or NBFCs and will help accelerate and enhance the flow of long-term debt in infrastructure projects in the country.

Although detailed guidelines for setting up IDFs will be issued separately, in a nut-shell, banks acting as sponsors to IDFs will be subject to existing prudential limits on investments in financial services companies and their capital market exposure while NBFCs will need to have at least Rs 300 crore or $60 million as net-owned funds.

Among the broad parameters indicated by the Reserve Bank of India, an NBFC sponsoring IDF-mutual fund will also have to maintain capital-to-risk assets ratio or capital adequacy ratio of 15 per cent; need to have less than 3 per cent non-performing assets of its net advances and should have been in existence for at least five years and profitable for the last three years.

This means start-up NBFCs would not be allowed to form IDF as a mutual fund, although there are no specific restrictions for NBFCs setting up the IDF as an NBFC.

But for IDFs formed as NBFC, its sponsors will have to contribute a minimum equity of 30 per cent and hold a maximum of 49 per stake. Banks and NBFC-Infrastructure Finance Company may sponsor such IDFs with prior approval by RBI.

RBI has also said that IDFs set as NBFC must have net-owned-funds of Rs 300 crore or more; they should have been assigned a minimum credit rating ‘A’ or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent rating by any other accredited rating agencies and tier II capital cannot exceed tier I capital and should have minimum capital adequacy ratio of 15 per cent of risk-weighted assets.

It will invest only in PPP and post-commercial operation date (COD) infrastructure projects, which have completed at least one year of satisfactory commercial operation and are a party to an agreement with the concessionaire and the project authority for ensuring a compulsory buyout with termination payment.

RBI has also set the criteria that bonds covering PPP and post-COD projects, in existence over a year of commercial operation, will be assigned a risk weight of 50 per cent and the exposure norms for IDF-NBFC will be linked to its total capital funds.

It has added that the maximum exposure that an IDF can take to a borrower or a group of borrowers will be at half of its total capital funds. Additional exposure up to 10 per cent will be allowed at the discretion of the board of the IDF-NBFC and limited additional exposure over 60 per cent can be taken with RBI’s prior approval.

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