For infra sector, 5:25 rule comes as a breath of fresh air

Beena Parmar Mumbai | Updated on December 16, 2014 Published on December 16, 2014


The scheme allows banks to refinance their long-term loans every 5 years

Amid stalled projects, mounting bad loans and bleak signs of economic recovery, banks and corporates have some reason to cheer as the Reserve Bank of India eased norms on infrastructure loans this week.

In order to tide over stressed assets, including restructured loans estimated at ₹6 lakh crore, or nearly a tenth of total loans, the RBI on Monday relaxed norms for structuring of existing long-term project loans to infrastructure and core industries.

“The guidelines provide a huge relief from the word ‘restructuring’ or ‘Corporate Debt Restructuring’ as perceived by the industry,” said Nirmal Gangwal, Founder and MD, Brescon Corporate Advisors, an independent financial advisory firm, specialising in liability management and structured finance. “CDR has often carried a stigma, though, in its true economic sense this is meant to be a corrective exercise. In any business you carry the risk of market uncertainty, timelines, pricing, regulatory and a host of other factors. If the timeline of repayment itself is erroneously restricted to 10 or 15 years, whereas, the project’s economic life is 20-25 years and its cash flows are beyond that, the business needs longer time to honour its debt redemption commitments,” Gangwal added. According to the RBI circular, “Banks can flexibly structure the existing project loans to infrastructure and core industries projects with the option to periodically refinance them.”

The 5:25 scheme envisages banks to refinance or sell out their long-term project loans after every five years so that both the borrower and the lender do not face any difficulty. For banks to avail such a facility, the loan tenure cannot be more than 25 years.

BB Joshi, Executive Director, Bank of Baroda, said, “Earlier, banks financed infrastructure projects despite strain on the Asset Liability Management profile. The liabilities (deposits) are of shorter duration, while loans are for a longer period. And as there were no development finance institutions or bond markets, banks had to fill up the gaps. Also, with ALM profile not allowing financing for 20-25 years, the repayment period shrunk and the instalments became larger than what the companies’ cash flow permitted, which was stressful.”

More projects

Finance Ministry data says 371 projects with investment of ₹18.47 lakh crore are pending with the Government’s Project Monitoring Group (PMG) of the Government as on November 17, as per media reports. However, a report by the Centre for Monitoring Indian Economy showed that 36 projects were revived in the September quarter, compared to 20 in the June quarter -- the highest in three years. The value of stalled infrastructure projects is now contained at slightly below ₹5 lakh crore. The State Bank of India, the country’s largest lender, had an exposure of ₹1.64 lakh crore to infrastructure as on September end, 2014, constituting over 16 per cent of total domestic advances. In total, public sector banks’ bad loans amounted to about ₹2.43 lakh crore, or 5.32 per cent of gross advances.

“Servicing of the loan is staggered over the life of the asset. This (guideline) will release more funds to infrastructure projects and benefit companies in a more realistic way,” said Vaibhav Agarwal, senior analyst, Angel Broking. He added, “From a structural point of view, over the medium to long term it is a decision in the right direction…All public and big private sector banks with high exposure to infrastructure will be benefited.”

Brescon’s Gangwal added that project lenders hitherto had only the option of classifying assets according to RBI guidelines or reviving the project despite the mismatch in permitted time period cash flows vis-à-vis the actual economic life of the project. Also, banks do not otherwise have an effective alternate mechanism, such as legal recourse to recovery. Neither have asset reconstruction companies proven very effective, he said.

Published on December 16, 2014
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