RBI Eases Refinancing Norms: Removes Building Blocks From Infrastructure Sector
RBI Eases Refinancing Norms: Removes Building Blocks From Infrastructure Sector
Reserve Bank of India/RBI has indicated that banks could refinance project term loans on a periodic basis following commencement of commercial operations by the projects. Loans can now be flexibly structured for projects in infrastructure and core industries.
Flexibility in Financing
The Reserve Bank of India/RBI has on 15th December, 2014 Monday gave permission to banks to flexibly structure existing project loans for the core industries as well as the infrastructure sector for periodically refinancing them as well. The option of periodic refinancing was earlier available for only the new loans within these segments.
“Only term loans to projects, in which the aggregate exposure of all institutional lenders exceeds Rs.500 crore, in the infrastructure sector and in the core industries sector will qualify for such flexible structuring and refinancing,’’ the RBI mandated in a notification to all banks.
The RBI said representation for this issue has been received from the banks, “as it would ensure long-term viability of existing infrastructure/core industries sector projects by aligning the debt repayment obligations with cash flows generated during their economic life.”
Banks were also asked for fixing fresh loan amortisation schedule for project loans which are currently prevalent once during the entire duration for which the project will last, following the date of commencement of commercial operations/DCCO associated with reassessment of project cash flows. This type of financing will not be treated as restructuring.
Viability of Project to be Vetted By Independent Evaluation Committee
The RBI also indicated the re-assessment of the viability of the project should be carried out by the bank and vetted by an Independent Evaluation Committee. RBI also indicated that the banks could refinance the project term loan on a periodic basis as well within 5 to 7 years following the beginning of the project’s commercial operations.
Conditions for Refinance
The refinance could be carried out by the same lender or a new set of lenders or a blend of both. It could also be carried out by both together or through an issue of corporate bond such as refinancing debt facility and “such refinancing may repeat till the end of the fresh loan amortisation schedule.’’
The RBI also stated that banks could provide longer loan amortisations taking flexible structuring of project loans to existing project loans for the infrastructure and core industries classified as NPAs/Non Performing Assets. The apex bank has also said the loans would be treated as restructuring and assets would continue to be treated as NPAs.
RBI has also said only loans where combined exposure by lenders in a single project exceeds 5 billion rupees is granted eligibility under the eased regulations. Stalled infrastructure projects will definitely get a boost due to this, according to media reports.
5:25 Scheme
This is also a massive boost for banks which are financing projects that take a lot of time to gestate. The central bank had first introduced this flexible financing scheme in July this year and it is referred to as the 5:25 scheme. This scheme allows banks for extending long term loans of 20 to 25 years for matching the cash flow of projects while providing refinancing for them every 5 or 7 years.
So far, banks were not lending beyond a period of 10 to 12 years. Cash flows of infrastructure were consequently stretched as shorter repayment schedules were to be met. Banks can now fix fresh loan amortisation schedules for current projects without any such exercise being treated as restructuring.
This scheme is crucial for the banks as freshly restructured assets will be considered as bad debt from April and a minimum of 15% provision will have to be set side against such loans. A restructuring exercise bear some similarity as lenders typically extend repayment schedule and this saves additional provisioning for the banks.
Long term infrastructure projects will now become viable. 5 sectors including infrastructure constitute 24% in total advances of commercial banks as per RBI data. These sectors also account for 53% of total stressed advances. Early, projects that became NPA were literally given to recourse of a few limited options.
Now banks and lenders can approach more constructive options for such projects. RBI has also said in its notification that the amortisation schedule could be within 85% of the initial concession period of the projects and there needs to be clarity in account of the banks regarding cash flow generation capacity of such projects.
RBI also said “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,” adding that banks may ascertain the loan pricing at each stage of the project term loan or refinancing debt facility, in terms of equivalence with risk at each phase of the loan.
The new RBI guidelines widen the scope of the 5:25 scheme through inclusion of existing standard project loans over the long term worth INR 500 crore for flexible structuring and refinancing. "The banks can flexibly structure the existing project loans to infrastructure and core industries projects with the option to periodically refinance them", the RBI also said in a circular."The structuring will ensure long-term viability of existing infrastructure and core industries projects by aligning the debt repayment obligations with cash flows generated during their economic life", the circular also added.
Conclusion
This is a positive step forward for the infrastructure sector which was otherwise plagued by many bottlenecks. India has a massive growing population and we need the infrastructure to support the addition of citizens each year. With infrastructural facilities on our side, we will be able to accomplish a lot of economic progress and stability. In fact, lack of adequate infrastructure has so far been one of the major stumbling blocks in the Indian growth story. This may change now.
