In a significant move, the Reserve Bank of India, in a notification issued on December 15, has allowed banks flexibility in structuring the existing project loans to infrastructure projects and core industries projects with the option to periodically refinance the same, subject to following conditions.
- Only term loans to projects, in which the aggregate exposure of all institutional lenders exceeds Rs. 500 crore, in the infrastructure sector (as defined under the Harmonised Master List of Infrastructure of RBI) and in the core industries sector (included in the Index of Eight Core Industries (base: 2004-05) will qualify for such flexible structuring and refinancing;
- Banks may fix a Fresh Loan Amortisation Schedule (FLAS) for the existing project loans once during the lifetime of the project, after the date of commencement of commercial operations (DCCO). Factoring reassessment of the project cash flows, FLAS would not be treated as ‘restructuring’ provided, the loan is a standard loan as on the date of change of loan amortisation schedule; and net present value of the loan remains same before and after the change in loan amortisation schedule.
Earlier, in July last, RBI had allowed flexible structuring of project loans with the option of periodic refinancing only to new loans to infrastructure projects and core industries projects. The present extension follows representation by banks to extend this flexibility to existing infra loans by aligning the debt repayment obligations with cash flows generated during their economic life.
In terms of these guidelines, FLAS should be 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 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, and the viability of the project is reassessed by the bank and vetted by the prescribed Independent Evaluation Committee.
If a project loan is classified as ‘restructured standard’ asset as on the date of fixing FLAS, the loan would continue to be classified as ‘restructured standard’ asset. However, any subsequent changes to the fresh loan amortisation schedule will be governed by the extant restructuring and prudential norms. Banks may refinance the project term loan through FLAS periodically (say five to seven years) after the project has commenced commercial operations. The repayment(s) at the end of each refinancing period could be structured as a bullet repayment, with the intent specified up front that it will be refinanced. 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.
Banks may also provide longer term loan amortisation through flexible loan structuring to existing project loans to infrastructure and core industries projects which are classified as ‘non-performing assets’. However, such an exercise would be treated as ‘restructuring’ and the assets would continue to be treated as ‘non-performing asset’. Such accounts may be upgraded only when all the outstanding loan/facilities in the account perform satisfactorily during the ‘specified period’.
Banks are unable to provide long tenor financing owing to asset-liability mismatch issues. To overcome the asset liability mismatch, they invariably 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 (with resultant higher loan installments), which not only strains the viability of the project, but also constrains the ability of promoters to generate fresh equity out of internal generation for further investments. Faced with this, there is a need for allowing banks to fix longer amortisation period for loans to projects in infrastructure and core industries sectors, say 25 years, based on the economic life or concession period of the project, with periodic refinancing, say, every five years, which can be by the same lending bank, or any other bank/consortium. This would help banks get over asset-liability management (ALM) mismatch, and bring into long term loans to infrastructure sector with flexible structuring, sometimes known as the 5/25 structure.
Exposure of banks in infrastructure funding is significant. Banks’ exposure to the infrastructure sector was assessed at around 15.6 per cent of total advances at the end of H1, up from 11.8 per cent in March 2010. In respect of public sector banks, the level of gross NPAs in the infrastructure sector stood at 2.4 per cent as the end of Q1, as compared to 1.36 per cent for private sector banks. However, Stressed Asset Ratio (Gross NPAs together with restructured advances/gross advances) was very high at 22.58 per cent for infrastructure sectors in public sector banks and 20.6 per cent in aggregate banking sector, as compared with 10.39 per cent in respect of all stressed loans in total gross loans in the banking sector.
The RBI measures, needed in view lack of corporate bond market and takeout financing mechanism, seek to enhance banks’ capacity for lending to infra projects that entail long gestation periods as also longer cycle of cash flow generation, guarding at the same time against a possibility of deterioration in asset quality.
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