The Reserve Bank of India (RBI) on Friday issued a draft harmonised prudential framework for lenders’ financing of projects in infrastructure, non-infrastructure and commercial real estate sectors even as it prescribed norms for restructuring of their exposure in projects under implementation on account of change in date of commencement of commercial operations (DCCO)..

In its draft prudential framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances - Projects Under Implementation (IRACP-PUIMP), RBI also outlined that in projects financed under consortium arrangements, where the aggregate exposure of the participant lenders to the project is up to ₹1,500 crore, no individual lender can have an exposure which is less than 10 per cent of the aggregate exposure.

For projects where 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.

The draft directions, which will be applicable to scheduled commercial banks, NBFCs, urban co-operative banks and All India Financial Institutions, also lay down revised regulatory dispensations for changes in the date of commencement of commercial operations (DCCO) of such projects.

Notwithstanding the exposure stipulations, post DCCO, lenders may acquire from or sell exposures to other lenders (new/existing) in the multiple banking/consortium arrangements. DCCO is the date by which a project is expected to be put to commercial use and completion certificate/provisional completion certificate is issued to the concessionaire.

Lenders desirous to have project finance exposures need to have a board approved policy for resolution of stress in the projects on occurrence of a credit event, per the Directions.

“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,” RBI said. 

RBI emphasised that for any project, all mandatory pre-requisites should be in place before financial closure.

An indicative list of such pre-requisites includes 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 PPP (public private participation) model, land availability to the extent of 50 per cent or more can be considered sufficient by lenders to achieve financial closure.

Financial closure

For all projects financed by the lenders, they must ensure that financial closure has been achieved and DCCO is clearly spelt out and documented prior to disbursement of funds.

The financing agreement shall generally not allow any provision for moratorium on repayments beyond DCCO period and repayment structure shall be realistically designed to factor in the lower initial cash flows, per the draft Directions.

However, in cases where a moratorium on repayments beyond DCCO is granted, the same shall not exceed six months from the commencement of commercial operations.

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.

RBI underscored 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 which may lead to credit impairment, shall be construed as a credit event.

Accordingly, lenders shall get the project NPV independently reevaluated every year.