Appraisal of financing infrastructure projects

Any credit facility provided to a borrower company engaged in an infrastructure facility is known as ‘infrastructure lending’.  The activities such as developing, or operating, and maintaining, or developing, operating, and maintaining any infrastructure facility of the following sector are called infrastructure projects.

1.  a road, including toll road, a bridge or a rail system;
2.  a highway project including other activities being an integral part of the highway project;
3.  a port, airport, inland waterway or inland port;
4.  a water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system;
5.  telecommunication services whether basic or cellular, including radio paging, domestic satellite service (i.e., a satellite owned and operated by an Indian company for providing telecommunication service), network of trunking, broadband network and internet services;
6. an industrial park or special economic zone ;
7. generation or generation and distribution of power;
8. transmission or distribution of power by laying a network of new transmission or distribution lines;
9. construction relating to projects involving agro-processing and supply of inputs to agriculture;
10. construction for preservation and storage of processed agro-products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality;
11. Construction of educational institutions and hospitals;
12. any other infrastructure facility of similar nature.

Public sector units registered under the Companies Act may be provided infrastructure term loans but such loans should not be in lieu of finance or to substitute budgetary resources envisaged for the project. The term loan could supplement the budgetary resources if such supplementing was contemplated in the project design. Banks and financial units should be careful, while lending to Special Purpose Vehicles (SPVs) registered under the Companies Act which may be the public sector units, their loans/investments are not used for financing the budget of the State Governments. Further, in the case of financing SPVs, banks and financial institutions should ensure that the funding proposals are for specific monitorable projects.

Banks may also lend to SPVs in the private sector, registered under the Companies Act for directly undertaking infrastructure projects. Such projects should be financially viable and SPVs are not for acting as mere financial intermediaries. Banks while appraising the credit proposal shall ensure that the bankruptcy or financial difficulties of the parent/ sponsor should not affect the financial health of the SPV.

Types of Financing by Banks:

Banks may extend credit facilities to infrastructure projects by way of working capital finance, term loan, project loan, subscription to bonds, and debentures/ preference shares/ equity shares acquired as a part of the project finance package which is treated as ‘deemed advance’ and any other form of funded or non-funded facility.

Appraisal:

Lending institutions can finance the technically feasible, financially viable, and bankable projects undertaken by both the public sector and private sector. Such finance should be within the overall ceiling of the prudential exposure norms prescribed by RBI for infrastructure financing. Credit appraisal of infrastructure projects, normally through SPVs, needs special appraisal skills. Identification of various project risks, evaluation of risk mitigation through appraisal of project contracts, and evaluation of creditworthiness of the contracting entities and their abilities to fulfill contractual obligations will be an integral part of the appraisal exercise. Appraising of technical feasibility, financial viability, and bankability of projects, with particular reference to the risk analysis and sensitivity analysis, needs specialized officers in this line. Lenders should carry out due diligence on the viability and bankability of such projects to ensure that the revenue stream from the project is sufficient to take care of the debt servicing obligations and that the repayment/servicing of debt is not out of budgetary resources. Banks should ensure that the individual components of financing and returns on the project are well defined and assessed. 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 Reserve Bank of India or any bank for regular standing instructions/periodic payment instructions for servicing the loans/bonds.

The tenor of the bank loans may not be longer than seven years. However, the Boards of banks can make an exception in specific cases, where necessary, for the financial viability of the project. The proposal for bank finance should have the approval of the Board.  Banks should ensure maintenance of stipulated margin at all times. 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. The standard of appraisal with regard to technical feasibility, financial viability, and bankability of individual projects and/or loan proposals should be the same, as is done in the case of a loan proposal seeking sanction of term finance/loan. In respect of infrastructure projects, banks may 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 percent of the project cost and undertakes normal credit appraisal, monitoring, and follow up of the project. Banks should suitably secure themselves before extending such guarantees.  Banks should not extend guarantees or letters of comfort in favour of overseas lenders including those assignable to overseas lenders, except for the relaxations permitted under FEMA.

Banks/FIs may consider establishing a Screening committee or Special cells for appraisal as well as for monitoring and follow up of the project which shall also ensure that the credit disbursed is utilized for the purpose for which it was sanctioned. Usually, the size of infrastructure funding requirements would necessitate joint financing by banks/FIs or financing by more than one bank under consortium or syndication arrangements. In such cases, participating banks/ FIs may, for the purpose of their own assessment, refer to the appraisal report prepared by the lead bank/FI or have the project appraised jointly.

Source: RBI master circular

Related Post: