Active Stocks
Sat Mar 02 2024 09:59:59
  1. Tata Steel share price
  2. 152.25 1.50%
  1. HDFC Bank share price
  2. 1,431.00 -0.01%
  1. State Bank Of India share price
  2. 774.35 0.66%
  1. Tata Motors share price
  2. 988.95 1.20%
  1. Reliance Industries share price
  2. 2,993.00 0.23%
Business News/ Market / Stock-market-news/  RBI eases norms for banks on infra projects funding

RBI eases norms for banks on infra projects funding

The central bank allowed banks to lend money to project developers for 25 years, with the option of resetting the cost of the funds every five years

RBI also included “affordable housing” in the definition of such long-term project financing in which banks will be eligible for the concessions. Photo: Indranil Bhoumik/MintPremium
RBI also included “affordable housing” in the definition of such long-term project financing in which banks will be eligible for the concessions. Photo: Indranil Bhoumik/Mint

Mumbai: In a major boost to the infrastructure sector, the Reserve Bank of India (RBI) on Tuesday allowed banks to extend 25-year loans to fund public works such as roads and ports, offering significant relief to developers by stretching the repayment period to cover the economic life of the project.

Such loans can be refinanced every 5-7 years, provided the projects continue to meet strict monitoring guidelines and do not become non-performing assets (NPAs) in the initial years, the central bank said in a notification on its website.

While allowing banks to lend to infrastructure developers for longer periods, RBI also made it easier for banks to raise long-term funds. Proceeds of long-term bond sales which will finance infrastructure will not have to meet certain regulatory requirements.

In his budget speech on 10 July, finance minister Arun Jaitley said banks will be encouraged to extend long-term loans to the infrastructure sector with flexible structuring to absorb potential adverse contingencies; for example, a 25-year loan that can be structured every five years. Against these loans, banks will be permitted to raise long-term funds with minimum regulatory pre-emption, Jaitley said.

Giving clarity to each of these announcements, RBI said banks can structure loans for up to 25 years in a manner that the loan is refinanced every 5-7 years on fresh terms. The refinancing can be done by the existing bank, a new set of banks or even via the bond markets.

RBI added: “Banks should recognise from a risk management perspective that there will be a probability that the loan will not be refinanced by other banks, and should take this into account when estimating liquidity needs as well as stress scenarios."

Effectively, this means that the loan would get refinanced every five years or so. The central bank also clarified that such structuring of loans will not be considered ‘restructuring’, which attracts higher provisioning and more bad debt classification.

Executives at some infrastructure companies, however, noted that at a time when companies are already laden with debt, the impact of some of these measures may limited. The economic downturn and delays in securing mandatory approvals and completing land acquisition have stalled many infrastructure projects in recent years.

“Give us saline first, then blood," said E. Sudhir Reddy, chairman at infrastructure firm IVRCL Ltd, referring to the fact that the financing will be restricted to future projects. “It is a good move to have 5:25 financing models. But infrastructure companies are struggling with their balance sheets currently."

The 5:25 model is the financing structure, proposed by Jaitley, in which loans are given for a duration of 25 years to infrastructure projects with the option of rewriting the loan terms or transferring the loan to another financial institution after five years.

According to bankers, typically a large project gets implemented within four-five years but it starts generating adequate cash flows after almost a decade of implementation. As such, an extended repayment period will help reduce the stress on infrastructure companies.

“The current lending policies of banks do not differentiate between project financing and regular term loan, SME (small and medium enterprises) financing etc. The loans extended to projects are presently for not more than 10–12 years, despite the project having substantially larger economic life and in many cases more than 30 years. This results in tight repayment schedules, leading to increased default and restructuring risks," said S.B. Nayar, chairman and managing director of India Infrastructure Finance Co. Ltd (IIFCL).

As per the new norms, at the time of the initial appraisal of such projects, banks will need to fix an amortization schedule while ensuring that the cash flows from such projects and all necessary financial and non-financial parameters are robust even under stress scenarios.

The tenor of such amortization should not be more than 80% of the initial concession period in case of infrastructure projects under the public-private partnership (PPP) model or 80% of the initial economic life envisaged at the time of project appraisal.

Typically, the concession period for such large projects runs up to 30 years.

The amortization schedule of a project loan can be modified once during the course of the loan, which will not be treated as a restructuring exercise, said RBI.

However, “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 recognize the loan as such and make necessary provisions as required under the extant regulations", the notification added.

“This will certainly help in improving bankability of infrastructure projects with long gestation period with typical ramp-up period between 2-3 years post-commercial operations date," said Sandeep Upadhyay, senior vice-president and head, infrastructure solutions group, Centrum Capital Ltd.

The biggest beneficiary of this mechanism would be the toll roads and port projects which have a relatively longer ramp-up period vis-a-vis power assets, Upadhyay said.

According to Nayar of IIFCL, the 5:25 mode of payment is a standard practice in all developed countries and this would lead to benefits including “reduction in default and restructuring risks; reduction in user charges (in toll or user fee based projects) and better valuation for equity".

This would also lead to improvement in the debt service coverage ratio, thereby reducing the equity requirements, specially for large projects where equity is hard to come by, Nayar said.

Meantime, to facilitate raising of funds for longer term lending, RBI has said that long-term bonds sold to finance the infrastructure sector will be exempt from certain regulatory requirements.

Typically, for any resources banks raise, they have to maintain a portion of it in cash with RBI, known as the cash reserve ratio, and invest a part of it in government bonds, known as statutory liquidity ratio. Besides, banks also have an obligation to lend 40% of their resources to the so-called priority sector, including small industrial units and agriculture.

Funds raised from long-term infra bonds will not counted for calculating such requirements, said RBI.

“Issuances of a few thousand crores in infrastructure bonds can easily happen in the market as banks are currently issuing lower amounts of tier-II bonds. However, to come up with bond issuances worth 40-50,000 crore, banks will have to find good infra projects that will not go bad throughout the tenure of the project," said Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership Ltd.

Seperately, RBI also included “affordable housing" in the definition of infrastructure.

Housing loans to individuals of upto 50 lakh, for houses valued at upto 65 lakh in six metropolitan centres and 40 lakh loans for houses valued at as much as 50 lakh in other centres will be considered affordable housing by the central bank.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Check all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates.
More Less
Published: 15 Jul 2014, 06:00 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App