The Reserve Bank of India has eased bank lending norms with flexibility in loan structuring and refinancing, and also granted exemptions from regulatory pre-emptions, such as, cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending (PSL) for supporting infrastructure projects.
It said the objective of these instructions is to mitigate the asset-liability management (ALM) problems faced by banks in extending project loans to infrastructure and core industry sectors, and also to ease the process of raising
long-term resources for project loans to infrastructure and affordable housing sectors.
Banks have not been able to provide long-tenor financing owing to asset-liability mismatch and they restrict their finance to a maximum period of 12-15 years. After factoring in the initial construction period and repayment moratorium, the repayment of the bank loan is compressed to a shorter period of 10-12 years leading to higher loan installments, which strains the viability of the project, but also constrains the ability of promoters to generate fresh equity out of internal generation for further investments.
The lenders had requested that they may be allowed to fix longer amortisation period for loans to projects in infrastructure and core industries sectors of around 25 years, based on the economic life or concession period of the project, with periodic refinancing, say every five years.
RBI said on Tuesday that it has not prescribed any ceiling or floor on repayment period of loans, except in the case of special regulatory treatment for some assets. It also noted that banks can refinance their existing infrastructure project loans by entering into take-out financing agreements with any financial institution (FI) on a pre-determined basis. If there is no pre-determined agreement, a standard account in the books of a bank can still be taken over by other banks/FIs, subject to guidelines on ‘transfer of borrowal accounts from one bank to another’.
However, it noted that banks refinancing may be construed as restructuring and for the purpose RBI has clarified that it would not have any objection to banks’ financing of long-term projects in infrastructure and core industries sector provided it confirms to certain clauses.
These include only term loans to identified infrastructure projects and projects in core industries sector (coal, crude oil, natural gas, petroleum refinery products, fertilisers, steel, cement & electricity) will qualify for such refinancing.
It has said at the time of initial appraisal of such projects, banks may fix an amortisation schedule while ensuring that cash flows from such projects and all necessary financial and non-financial parameters are robust even under stress scenarios.
Moreover, the tenor of the amortisation schedule should not be more than 80 per cent (leaving a tail of 20 per cent) of the initial concession period in case of infrastructure projects under public private partnership (PPP) model; or 80 per cent of the initial economic life envisaged at the time of project appraisal for determining the user charges/tariff in case of non-PPP infrastructure projects; or 80 per cent of the initial economic life envisaged at the time of project appraisal by lenders independent engineer in the case of other core industries projects.
RBI said the bank offering the initial debt facility may sanction the loan for a medium term, say 5-7 years. This is to take care of initial construction period and also cover the period at least up to the date of commencement of commercial operations and revenue ramp up. The repayment(s) at the end of this period could be structured as a bullet repayment, with the intent specified up front that it will be refinanced. That repayment may be taken up by the same lender or a set of new lenders, or a combination of both, or by issue of corporate bond, as refinancing debt facility, and such refinancing may repeat till the end of the amortisation schedule.
It added that the amortisation schedule of a project loan may be modified once during the course of the loan based on the actual performance of the project in comparison with the assumptions made during the financial closure without being treated as ‘restructuring’.
However, this would be subject to provisions such as the loan is a standard one as on the date of change of amortisation schedule, net present value of the loan remains the same before and after the change in amortisation schedule and the entire outstanding debt amortisation is scheduled within 85 per cent of the economic life of the project.
RBI said that if the initial debt facility or refinancing debt facility becomes NPA at any stage, further refinancing should stop and the bank which holds the loan when it becomes NPA, would be required to recognise the loan as such and make necessary provisions. Once the account comes out of NPA status, it will be eligible for refinancing.
It has said that banks will be initially allowed to count the cash flows from periodic amortisations of loans as also the bullet repayment of the outstanding debt at the end of each refinancing period for their asset-liability management; however, with experience gained, banks will be required in due course to conduct behavioural studies of cash flows in such amortisation of loans and plot them accordingly in ALM statements.
RBI said banks should also have a board approved policy for such financing.
The central bank acknowledged that long term financing for infrastructure has been a major constraint in encouraging larger private sector participation in this sector. On the asset side, banks will be encouraged to extend long-term loans to the infrastructure sector with flexible structuring to absorb potential adverse contingencies, sometimes known as the 5/25 structure. On the liability side, banks will be permitted to raise long-term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL).
Early this year, RBI had also issued the framework for revitalising distressed assets in the economy, which, among other things, addressed the issue of refinancing of project loans.
(Edited by Joby Puthuparampil Johnson)