The rapid growth of Indian economy critically depends on the state of
infrastructure in the country. At the current juncture, the development of infrastructure
in India, particularly in the key sectors like power, telecommunications, roads
and ports, is critical. The Government of India and Reserve Bank of India have,
therefore, accorded top priority for infrastructure development, with an enabling
policy framework for participation by private sector. As a supplement to the
Reserve Bank's policy in post‑April 1997 period (viz., bestowing
operational freedom to banks in the matter of credit dispensation) and in view
of the national importance attached to infrastructure development, RBI has
considered it necessary to address important aspects involved in the financing
of infrastructure projects and to set out operational guidelines, which the
financing banks/institutions should bear in mind while extending credit for
such projects. The operational guidelines are explained in the succeeding
paragraphs.
GUIDELINES ON FINANCING INFRASTRUCTURE
PROJECTS1
1. Any credit facility in whatever form extended by lenders (i.e., banks, FIs NBFCs) to an infrastructure facility as specified below falls within the definition of "infrastructure lending". In other words, a credit facility provided to a borrower company engaged in
§ developing, or
§ operating and maintaining, or
§ developing, operating and maintaining any infrastructure facility that is a project in any of the following sectors
(i) a road, including toll
road, a bridge or a rail system;
(ii) a highway project
including other activities, being an integral part of the highway project;
(iii) a port, airport, inland
waterway or inland port;
(iv) a
water supply project, irrigation project, water treatment system, sanitation
and sewerage system or solid waste management system;
(v) 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
(vi) an industrial park or
special economic zone;
(vii) generation or generation
and distribution of power;
(viii) transmission or
distribution of power by laying a network of new transmission or distribution
lines;
(ix) any other infrastructure
facility of similar nature.
Banks/FIs are free to finance technically feasible, financially viable
and bankable projects undertaken by both public sector and private sector
undertakings subject to the following conditions:
(i) The
amount sanctioned should be within the overall ceiling of the prudential
exposure norms1 prescribed by RBI for infrastructure financing (please see paragraph 5.
1 also)
(ii) Banks/FIs
should have the requisite expertise for appraising technical feasibility,
financial viability and bank ability of projects, with particular reference to
the risk analysis and sensitivity analysis (please see paragraph 4 also).
(iii) In
respect of projects undertaken by public sector units, term loans may be
sanctioned only for corporate entities (i.e., public sector undertakings
registered under Companies Act or a Corporation established under the relevant
statute). Further, such term loans should not be in lieu of 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. While such public sector units may include Special Purpose Vehicles
(SPVs) registered under the Companies Act set up for financing infrastructure
projects, it should be ensured by banks and financial institutions that these
loans/investments are not used for financing the budget of the State
Governments. Whether such financing is done by way of extending loans or
investing in bonds, banks and financial institutions should undertake due
diligence on the viability and bank ability of such projects to ensure that
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. Further, in the case of financing SPVs, banks and financial
institutions should ensure that the funding proposals are for specific monitor
able projects.
(iv) Banks may also lend to SPVs in the private sector, registered under Companies Act for directly undertaking infrastructure projects which are financially viable and not for acting as mere financial intermediaries. Banks may ensure that the bankruptcy or financial difficulties of the parent/sponsor should not effect the financial health of the SPV.
3. Types of Financing by Banks
3.1 In order to meet financial requirements of
infrastructure projects, banks may extend credit facility 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.
3.2 Take‑out Financing
Banks may enter into take‑out financing arrangement with
IDFC/other financial institutions or avail of liquidity support from IDFC/other
FIs. A brief write‑up on some of the important features of the
arrangement is given in Appendix 29.1. Banks may also be guided by the
instructions regarding takeout finance contained in Circular No. DBOD.BP.BC.
144/21.04.048/2000, dated 29 February, 2000.
3.3 Inter‑institutional Guarantees
In terms of the extant RBI instructions, banks are precluded from
issuing guarantees favouring other banks/lending institutions for the loans
extended by the latter, as the primary lender is expected to assume the credit
risk and not pass on the same by securing itself with a guarantee i.e.,
separation of credit risk and funding is not allowed. These instructions are
presently not applicable to FIs. While Reserve Bank is not in favour of a
general relaxation in this regard, keeping in view the special features of
lending to infrastructure projects viz, high degree of appraisal skills on the
part of lenders and availability of resources of a maturity matching with the
project period, banks are permitted to issue guarantees favouring other lending
institutions in respect of infrastructure projects, 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.
3.4 Financing promoter's equity
In terms of our Circular DBOD.Dir.BC.90/13.07.05/98, dated 28 August
1998, banks were advised that the promoter's contribution towards the equity
capital of a company should come from their own resources and the bank should
not normally grant advances to take up shares of other companies. In view of
the importance attached to infrastructure sector, it has been decided that,
under certain circumstances, an exception may be made to this policy for
financing the acquisition of promoter's shares in ' an existing company which
is engaged in implementing or operating an infrastructure project in India. The
conditions, subject to which an exception may be made are as follows :
(i) The
bank finance would be only for acquisition of shares of existing companies
providing infrastructure facilities as defined in paragraph 1 above. Further,
acquisition of such shares should be in respect of companies where the existing
foreign promoters (and/or domestic joint promoters) voluntarily propose to
disinvest their majority shares in compliance with SEBI guidelines where
applicable.
(ii) The companies to which
loans are extended should, inter alia, have a satisfactory net worth.
(iii) The company financed
and the promoters/directors of such companies should not be defaulter to banks/FIs.
(iv) In
order to ensure that the borrower has a substantial stake in the infrastructure
company, bank finance should be restricted to 50% of the finance required for
acquiring the promoter's stake in the company being acquired.
(v) Finance
extended should be against the security of the assets ‑of the borrowing
company or the assets of the company acquired and not against the shares of
that company or the company being acquired. The shares of borrower
company/company being acquired may be accepted as additional security and not
as primary security. The security charged to the banks should be marketable.
(vi) Banks should ensure
maintenance of stipulated margin at all times.
(vii) 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 financial
viability of the project.
(viii) This
financing would be subject to compliance with the statutory requirements under
section 19(2) of the Banking Regulation Act, 1949.
(ix) The
banks financing acquisition of equity shares by promoters should be within the
regulatory ceiling of 5 percent on capital market exposure in relation to its
total outstanding advances (including commercial paper) as o n March 31 of the
previous year.
(x) The proposal for bank
finance should have the approval of the Board.
(i) In
respect of financing of infrastructure projects undertaken by Government owned
entities, banks/Financial Institutions should undertake due diligence on the
viability of the projects, 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 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.
(ii) Infrastructure
projects are often financed through Special Purpose Vehicles. Financing of
these projects would, therefore, call for special appraisal skills on the part
of lending agencies. 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 fulfil
contractual obligations will be an integral part of the appraisal exercise. In
this connection, banks/F1s may consider constituting appropriate screening
committees/special cells for appraisal of credit proposals and monitoring the
progress/ performance of the projects. Often, the size of the funding
requirement would necessitate joint financing by banks/FIs or financing by more
than one bank under consortium or syndication arrangements. In such cases,
participating banks/Ms 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.
5.1 Prudential credit exposure limits
Credit exposure to borrowers belonging to a group may exceed the
exposure norm of 40 per cent of the bank's capital funds by an additional 10
per cent (i.e., up to 50 per cent), provided the additional credit exposure is on
account of extension of credit to infrastructure projects. Credit exposure to
single borrower may exceed the exposure norm of 15 per cent of the bank's
capital funds by an additional 5 per cent (i.e., up to 20 per cent) provided
the additional credit exposure is on account of infrastructure as defined in
paragraph 1 above.
5.2 Assignment of risk weight for capital adequacy
purposes
Banks may assign a concessional risk weight of 50 per cent for capital
adequacy purposes, on investment in securities paper pertaining to an
infrastructure facility subject to compliance with the following :
(a) The infrastructure
facility should satisfy the conditions stipulated in paragraph 1 above.
(b) The infrastructure
facility should be generating income/cash flows which would ensure
servicing/repayment of the securities paper.
(c) The
securitised paper should be rated at least 'AAA' by the rating agencies and the
rating should be current and valid. The rating relied upon will be deemed to be
current and valid if :
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(i) The
rating is not more than one month old on the date of opening of the issue, and
the rating rationale from the rating agency is not more than one year old on
the date of opening of the issue, and the rating letter and the rating
rationale is a part of the offer document.
(ii) In
the case of secondary market acquisition, the 'AAA' rating of the issue should
be in force and confirmed from the monthly bulletin published by the respective
rating agency.
(iii)
The securitised paper should be a performing
asset on the books of the investing/lending institution.
5.3 Asset‑Liability Management
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 tending
to such projects.
6. Administrative arrangements
Timely and adequate availability of credit is the pre‑requisite
for successful implementation of infrastructure projects. Banks/FIs should,
therefore, clearly delineate the procedure for approval of loan proposals and
institute a suitable monitoring mechanism for reviewing applications pending
beyond the specified period. Multiplicity of appraisals by every institution
involved in financing, leading to delays, has to be avoided and banks should be
prepared to broadly accept technical parameters laid down by leading public
financial institutions. Also, setting up a mechanism for an ongoing monitoring
of the project implementation will ensure that the credit disbursed is utilised
for the purpose for which it was sanctioned.
(a) Take‑out
financing arrangement‑ Take‑out
financing structure is essentially a mechanism designed to enable banks to
avoid asset liability maturity mismatches that may arise out of extending long
tenor loans to infrastructure projects. Under the arrangements, banks financing
the infrastructure projects will have an arrangement with, IDFC or any other
financial institution for transferring to the latter the out standings in their
books on a pre‑determined basis. IDFC and SBI have devised different take‑out
financing structures to suit the requirements of various banks, addressing
issues such as liquidity, asset liability mismatches, limited availability of
project appraisal skills, etc. They have also developed a Model Agreement that
can be considered for use as a document for specific projects in conjunction
with other project loan documents. The agreement between SBI and IDFC could
provide reference point for other banks to enter into somewhat similar
arrangements with IDFC or other financial institutions.
(b) Liquidity
support from IDFC‑ As an alternative to
take‑out financing structure, IDFC and SBI have devised a product, providing
liquidity support to banks. Under the scheme, WC would commit, at the point of
sanction, to refinance the entire outstanding loan (principal + unrecovered
interest) or part of the loan to the bank after an agreed period, say, five
years. The credit risk on the project will be taken by the bank concerned and
not by IDFC. The bank would repay the amount to IDFC with interest as per the
terms agreed upon. Since IDFC would be taking a credit risk on the bank, the
interest rate to be charged by it on the amount refinanced would depend on the
IDFC’s risk perception of the bank (in most of the cases, it may be close to
IDFC PLR). The refinance support from IDFC would particularly benefit the banks
which have the requisite appraisal skills and the initial liquidity to fund the
project.