As per RBI master circular, it is a prerequisite for banks to fix a Date of Commencement of Commercial Operations (DCCO) for all project loans at the time of sanction of the loan or financial closure in the case of multiple banking or consortium arrangements. Financial closure is defined as a stage when all the conditions of a financing agreement are fulfilled prior to the initial availability of funds. The financial closure for Greenfield projects is defined as a legally binding commitment of equity holders and debt financiers to provide or mobilise funding for the project. Such funding must account for a significant part of the project cost which should not be less than 90 per cent of the total project cost securing the construction of the facility.
For the purpose of interest recognition and asset classification (IRAC) norms, a project loans are divided into Project Loans for the infrastructure sector and Project Loans for the non-infrastructure sector.
A loan for an infrastructure project will be classified as NPA in the following cases;
- During any time before a Date of Commencement of Commercial Operations (DCCO) as per record of recovery (90 days overdue), unless it is restructured and becomes eligible for classification as ‘standard asset’ subject to certain conditions in accordance with the provisions specified in the RBI master circular.
- If it fails to commence commercial operations within two years from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as ‘standard asset’ subject to certain conditions in accordance with the provisions specified in the RBI master circular.
According to RBI master circular dated July 1, 2014, a project loan classified as ‘standard asset’ if it is restructured any time during the period up to two years from the original date of commencement of commercial operations (DCCO), it can be retained as a standard asset if the fresh DCCO is fixed within the following limits, and further provided the account continues to be serviced as per the restructured terms.
(a) Infrastructure Projects involving court cases: Up to another 2 years (beyond the existing extended period of 2 years i.e total extension of 4 years), in case the reason for extension of date of commencement of production is arbitration proceedings or a court case.
(b) Infrastructure Projects delayed for other reasons beyond the control of promoters: Up to another 1 year (beyond the existing extended period of 2 years i.e. total extension of 3 years), in other than court cases.
It is re-iterated in the circular that the above dispensation is subject to adherence to the provisions regarding restructuring of accounts as contained in the Master Circular which would inter alia require that;
- The application for restructuring should be received before the expiry of period of two years from the original DCCO and when the account is still standard as per record of recovery. The other conditions applicable would be:
- In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond two years from the original DCCO, considering the high risk involved in such restructured accounts.
In case, bank finance given for industrial projects where moratorium is available for payment of interest, payment of interest becomes due only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue and hence NPA, with reference to the date of debit of interest. The account becomes overdue after due date for payment of interest, if uncollected.
As per RBI guidelines, wherever a unit commences commercial production, but the level and volume of production reached immediately after the date of completion of the project is not adequate to generate the required cash flow to service the loan, it may be necessary to re-fix the repayment schedule. In such cases, the Board of Directors of the bank may lay down broad parameters for guidance of the staff for taking a view whether the unit has stabilised commercial production and there is a need for rescheduling of the loan to treat such advance as NPA or not. In respect of credit facilities sanctioned under consortium arrangements, the decision as to whether the borrowing unit has achieved regular commercial production and there is a need for rescheduling may be taken by the lead institution or lead bank and other participating institutions/banks may follow the same.
The following points may be kept in view while framing parameters for to treat an advance as NPA or not:
(a) In order to arrive at a decision as to whether the unit/project has achieved regular commercial production, the main guiding factor would be whether the unit has achieved cash break-even in order to service the loan.
(b) If in the opinion of the bank, the bottleneck in achieving regular commercial production is of a temporary nature not indicative of any long-term impairment of the unit’s economic viability and it is likely to achieve cash break even if some time is allowed, the bank may reschedule the loan and treat the asset as standard.
(c) However, the lead time would normally not exceed one year from the schedule of commencement of commercial production as indicated in the terms of sanction.