RBI allows banks flexibility to restructure infra loans

In a major initiative to kickstart stalled projects, the Reserve Bank of India (RBI) has decided to allow banks the flexibility to structure existing loans to infrastructure and core industry projects, with an option to periodically refinance these projects.

The RBI had earlier allowed flexible structuring of project loans only to new infrastructure loans sanctioned after 15 July, but has now decided to extend it to even restructured assets, provided they remain standard assets.

The relaxation, under the so-called 5:25 refinance scheme, enables banks to refinance a project after a period of say every 5 or 7 years with new set of norms on pricing depending upon the prevailing conditions, the RBI said in statement.

The facility will be offered only to term loans in projects where the aggregate exposure of all institutional lenders exceeds Rs500 crore, the RBI said.

Under the 5:25 scheme, banks can give loans to new infra projects for a 25-year period and refinance them every five years provided these projects do not become a non-performing asset.

In a circular to all commercial banks, the RBI said fresh amortisation for existing projects will be allowed once during lifetime of the project and will not be termed as refinancing if the following riders are met:

  • The loan is a standard loan as on the date of change of loan amortisation schedule;
  • Net present value of the loan remains the same before and after the change in loan amortisation schedule;
  • The fresh loan amortisation schedule is within 85 per cent (leaving a tail of 15 per cent) of the initial concession period in case of infrastructure projects under public private partnership (PPP) model; or
  • 85 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
  • 85 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; and
  • The viability of the project is reassessed by the bank and vetted by the independent evaluation committee constituted under the aegis of the framework for revitalising distressed assets in the economy.

Going by the guidelines, banks can determine the pricing at each stage of the project and such pricing should not be below the base rate, or minimum lending rate, of the bank.

While flexible structuring of project loans with the option of periodic refinancing was available to new loans to infrastructure projects and core industry projects sanctioned after 15 July 2014, RBI said, it has now been extended to existing loans to infrastructure projects and core industry projects, as it would ensure long term viability of projects by aligning the debt repayment obligations with cash flows generated during their economic life.

For a project loan classified as 'restructured standard' asset as on the date of fixing the fresh loan amortisation schedule, the exercise of fixing the fresh loan amortisation schedule may not be treated as an event of 'repeated restructuring', and the loan should continue to be classified as 'restructured standard' asset, RBI said.

Upgradation of such assets would be governed by the extant prudential guidelines on restructuring of accounts taking into account the fresh loan amortisation schedule.

The refinance may be taken up by the same lender or a set of new lenders, or combination of both, or by issue of corporate bond, as refinancing debt facility, and such refinancing may repeat till the end of the fresh loan amortisation schedule.

If the project term loan or refinancing debt facility becomes a non-performing asset (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 as required under the extant regulations. Once the account comes out of NPA status, it will be eligible for refinancing in terms of these instructions.

Banks may determine the pricing of the loans at each stage of the project term loan or refinancing debt facility, commensurate with the risk at each phase of the loan, and such pricing should in any case not be below the Base Rate of the bank.

Banks should secure their interest by way of proper documentation and security creation, etc.

Banks will initially be 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. But, with experience gained, banks will be required to conduct behavioural studies of cash flows in such amortisation of loans and plot them accordingly in ALM statements.

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. They should also, in due course, formulate their own board-approved policy for such financing, RBI said.

Finance ministry figures show that 371 projects with investments of Rs18,47,266 crore are stalled and pending for resolution with the Project Monitoring Group of the government. This has also led to a fall in new project investments in the country. State-owned banks, which funded these projects predominantly, are already saddled with Rs2,43,043 crore of bad loans, comprising  about 5.32 per cent of their total advances.