The Finance Ministry has asked Reserve Bank of India Governor Raghuram Rajan to provide greater flexibility to banks funding stalled infrastructure projects, after concerns were raised by senior bankers that some lending requirements were too ‘stringent’.
A department of financial services communication to Rajan sought to de-link the extent of cost overruns as a condition for classifying any project as a restructured asset.
It also sought to allow lenders to decide the extent of funding, as well as the debt-equity ratio of the project, and the upfront contribution from promoters, finance ministry officials said.
In a circular dated August 14, the central bank had stipulated that banks could fund cost overruns for projects where the date of commencement of commercial operations had been extended by two years, without treating the loans as a ‘restructured asset’, provided that funding any cost overrun, excluding interest during construction, be capped at 10 per cent of the original project cost.
The circular also stipulated that debt-equity ratios agreed upon at the time of initial financial closure should remain unchanged subsequent to funding cost overruns or should improve in favour of the lenders.
The department is believed to have communicated that since the endeavour of the government was to ensure completion of stalled projects by creating an enabling environment, the RBI directive was counter-productive and should be relaxed, the officials added.
In the letter, the department also asked that the benefits of long-term loans based on the economic life of the projects be extended to existing projects where the DCCO had not been achieved.
According to another RBI guideline, effective from July this year, the tenor of the loan should not be more than 80 per cent of the initial economic life envisaged at the time of project appraisal.
This demand is similar to the one raised by State Bank of India Chairperson Arundhati Bhattacharya in a communication to the RBI last week.
Bhattacharya had asked that the 5/25 scheme be allowed for existing projects to relieve the stress on companies.
In the 5/25 structure, the bank could fix longer amortisation period (about 25 years) for loans to projects in infrastructure and core industry sectors, with periodic refinancing, say, every five years.
Such restructuring would enable loan repayment to be co-terminus with cash flows from the projects.
It would also improve debt-servicing capacity and viability of the operational projects.
The department, meanwhile, is also believed to have asked the RBI to ensure a level playing field for Indian and foreign banks on the issue of raising funds through external commercial borrowing to finance existing ECB and revolving term loans.
Certain directives by the central bank have restricted Indian banks’ ability to offer foreign funding to their clients in some cases.
As a result of such directives, Indian banks are required to have incremental capital and provision requirement for the unhedged forex positions of their borrowers for financing extended by overseas branches, whereas foreign banks are not subject to this.
The department asked that the RBI consider allowing foreign branches of Indian banks to provide foreign currency funds in case of additional ECBs being used to refinance existing ECBs and RTL.
A TIMELY PUSH?
Norms in place
- RBI currently allows banks to fund project cost overruns, if such overruns are capped at 10% of total cost
- RBI allows lending only if a project’s debt-equity ratio remains unchanged, subsequent to funding cost overruns
- RBI allows long-tenure loans in projects where date of commencement of commercial operations is set to be achieved
Changes sought
- Ministry says current norms are too stringent, seeks relaxation
- It wants lenders to decide the extent of funding, debt-to-equity ratio and upfront contribution from promoters
- It has sought a level playing field with foreign banks on certain ECB regulations
