Framework for project financing and provisioning in infrastructure and real estate sectors

The Reserve Bank of India issued draft guidelines to provide a harmonised prudential framework for financing projects in Infrastructure, Non-Infrastructure, and Commercial Real Estate sectors by regulated entities (REs). In the backdrop of a review of the extant instructions and analysis of the risks inherent in such financing, the Central Bank prescribed norms for restructuring their exposure in projects under implementation on account of change in the date of commencement of commercial operations (DCCO) of such projects. The Comments on the draft Direction are invited from the public/stakeholders by June 15, 2024.

For Income Recognition, Asset Classification, and Provisioning (IRCAP) about Advances – Projects Under Implementation (PUIMP), a Project Finance is broadly divided into three phases namely; the Design phase, Construction phase, and operational phase. Lenders desirous to have project finance exposures shall have a Board-approved policy for the resolution of stress in the projects on the occurrence of a credit event.

RBI outlined an exposure limit in projects financed under consortium arrangements, where the aggregate exposure of the participant lenders to the project is up to ₹1,500 crores, no individual lender can have an exposure that is less than 10 per cent of the aggregate exposure. For projects where the aggregate exposure of lenders is more than ₹1,500 crore, this individual exposure floor will be 5 per cent or ₹150 crores, whichever is higher.

For any project, all mandatory prerequisites as per the indicative list provided by the regulator should be in place before financial closure, said the circular. An indicative list of such prerequisites includes the availability of encumbrance-free land and/or right of way, environmental clearance, legal clearance, regulatory clearances, etc., as applicable for the project. However, for infrastructure projects under the PPP model, land availability to the extent of 50% or more can be considered sufficient by lenders to achieve financial closure.

As per the draft direction, for all projects financed, lenders must ensure that financial closure has been achieved and DCCO is spelled out and documented before disbursement of funds. Moreover, lenders shall ensure that disbursal is proportionate to the stages of completion of the project as well as to the progress in equity infusion, as agreed. In the case of PPP projects, disbursement of funds should begin only after a declaration of the appointed date of the project. The project-specific disbursement schedule vis-à-vis the stage of completion of the project shall be prescribed by the lenders. Further, the lender’s Independent Engineer (LIE)/Architect must certify the stages of completion of the project.

The financing agreement shall generally not allow any provision for a moratorium on repayments beyond the DCCO period and the repayment structure shall be realistically designed to factor in the lower initial cash flows, per the draft Directions. The original or revised repayment tenor, including the moratorium period, if any, shall not exceed 85 per cent of the economic life of the project.

“It is expected that the lenders monitor the build-up of stress in a project on an ongoing basis and initiate a resolution plan well in advance. Occurrence of a credit event, during the construction phase, with any of the lenders in the project finance arrangement, within or outside the consortium, shall trigger a collective resolution,” said the draft direction.

Reserve Bank emphasized that a positive net present value (NPV) is a prerequisite for any Project financed by lenders. Any subsequent diminution in NPV during the construction phase, either due to changes in projected cash flows, project life-period, or any other relevant factor that may lead to credit impairment, shall be construed as a credit event. Accordingly, lenders shall get the project NPV independently re-evaluated every year.

Provisioning for exposures:

In the draft norms on the project under implementation, the regulator proposed a standard asset provision requirement of 5 per cent during the under-construction period in a phased manner.

Construction Phase: A general provision of 5% of the funded outstanding shall be maintained on all existing as well as fresh exposures on a portfolio basis.

Operational Phase: Once the project reaches the ‘Operational phase’, it can be reduced to 2.5% of the funded outstanding. This can be further reduced to 1% of the funded outstanding provided that the project has (a) a positive net operating cash flow that is sufficient to cover current repayment obligation to all lenders, and (b) total long-term debt of the project with the lenders has declined by at least 20% from the outstanding at the time of achieving DCCO.

For cumulative DCCO deferments of more than 2 years and 1 year for infrastructure and non-infrastructure projects respectively, lenders shall maintain additional specific provisions of 2.5% over and above the applicable standard asset provision.

Provisioning for non-performing assets shall be as per extant instructions contained in Master Circular – Prudential norms on Income Recognition, Asset Classification, and Provisioning as applicable to the respective lender, updated from time to time.

The provisions of these Directions shall apply to regulated entities like commercial banks, and small finance banks except RRBs, NBFCs, All India Financial Institutions (AIFIs)

A resolution plan involving change in DCCO shall be deemed to be implemented only, if all of the following conditions are met:

(i) all required documentation, including the execution of necessary agreements between lenders and the debtor/creation of security charge/perfection of securities, are completed.

(ii) the new capital structure and/or changes in the financing agreement get duly reflected in the books of all the lenders and the debtor; In the Post-Resolution Plan, financial parameters like the D/E ratio, and DSCR. etc., and external credit rating, if any, shall remain unchanged or enhanced in favour of lenders.

Post-Resolution Plan, financial parameters like D/E ratio, DSCR. etc., and external credit rating, if any, shall remain unchanged or enhanced in favour of lenders.

If the resolution plan involving a change in DCCO is not successfully implemented within 180 days from the end of the review period, conforming to the stipulations laid down in these Directions, then the account shall be downgraded to non-performing asset (NPA) immediately.

Criteria for Upgradation:

Project finance accounts downgraded to NPA can be upgraded after 360 days from the end of the Review Period, provided the Resolution Plan has been successfully implemented, no further diminution in fair value of the asset has happened and no further request for DCCO is made.