Guidelines for funding infrastructure projects by RBI

Banks and financial institutions are free to finance technically feasible, financially viable and bankable projects undertaken by both public and private sector undertakings, subject to the following conditions: * The amount sanctioned should be within the overall ceiling of the prudential exposure norms prescribed by RBI for infrastructure financing. * Banks/ FIs should have the requisite expertise for appraising technical feasibility, financial viability and bankability of projects, with particular reference to the risk analysis and sensitivity analysis. * In respect of infrastructure projects, where financing is by way of term loans or investment in bonds issued by government owned entities, banks/FIs should undertake due diligence on the viability and bankability of such projects to ensure efficient utilisation of resources and creditworthiness of the projects financed.
*Banks should also ensure that the individual components of financing and returns on the project are well defined and assessed. Lending and investment decisions in such cases should be based solely on commercial judgment of banks/FIs. State government guarantees may not be taken as a substitute for satisfactory credit appraisal and such appraisal requirements should not be diluted on the basis of any reported arrangement with the RBI or any bank for regular standing instructions/periodic payment instructions for servicing the loans/bonds. * Banks may also lend to special purpose vehicles (SPVs) in the private sector, registered under the Companies Act for directly undertaking infrastructure projects, which are financially viable and not for acting as mere financial intermediaries. Banks may ensure that the bankruptcy or financial difficulties of the parent/sponsor should not affect the financial health of the SPV. *Infrastructure would include developing, maintaining and operating projects in power, roads, highways, bridges, ports, airports, rail systems, water supply, irrigation, sanitation and sewerage systems, telecommunication, housing, industrial park or any other public facility of a similar nature. Relaxation in ceiling Credit exposure limits: Credit exposure to borrowers belonging to a group may exceed the exposure norm of 40 per cent of the bank's capital funds by an additional 10 per cent (i.e. up to 50 per cent), provided the additional credit exposure is on account of extension of credit to infrastructure projects. Credit exposure to single borrower may exceed the exposure norm of 15 per cent of the bank's capital funds by an additional 5 per cent (i.e. up to 20 per cent) provided the additional credit exposure is on account of infrastructure projects. Credit exposure would also include investment exposure. Risk weight for capital adequacy purposes: Banks may assign a concessional risk weight of 50 per cent for capital adequacy purposes, on investment in securitised paper pertaining to an infrastructure facility, subject to compliance with certain conditions. Asset-liability management: The long-term financing of infrastructure projects may lead to asset-liability mismatches, particularly when such financing is not in conformity with the maturity profile of a bank's liabilities. Banks would, therefore, need to exercise due vigil on their asset-liability position to ensure that they do not run into liquidity mismatches on account of lending to such projects. Take-out financing/liquidity support Take-out financing structure is essentially a mechanism designed to enable banks to avoid asset-liability maturity mismatches that may arise out of extending long tenor loans to infrastructure projects. Under the arrangements, banks financing the infrastructure projects will have an arrangement with IDFC or any other FI for transferring to the latter the outstanding in their books on a predetermined basis. IDFC and SBI have devised different take-out financing structures to suit the requirements of various banks, addressing issues such as liquidity, asset-liability mismatches, limited availability of project appraisal skills etc. RBI has prescribed guidelines on prudential norms, income recognition and provisioning on take-out finance by financial institutions. Assets classification of projects A time overrun of up to 50 per cent of the time contracted is permitted for downgrading the asset to sub-standard category. A one-time re-fixing of the time period of the project is allowed with the approval of the Board of the FI even if the time overrun is more than 50 per cent and in that case, the asset could be treated as standard till the time so re-fixed by the Board. The projects under implementation are classified into three categories for the purpose of determining the date when the project ought to be completed: * Category I: Projects where financial closure had been achieved and formally documented * Category II: Projects with original project cost of Rs.100 crore or more * Category: III: Projects with original project cost of less than Rs.100 crore For each of the three categories, the date when the project ought to be completed and the classification of the underlying loan asset is sought to be determined. Guarantee In respect of infrastructure projects, banks would be permitted to issue guarantees favouring other lending institutions provided the bank issuing the guarantee takes a funded share in the project at least to the extent of 5 per cent of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project.