RBI eases norms for refinancing of long-term project loans

Mumbai: The Reserve Bank of India (RBI) on Thursday gave banks more flexibility to refinance their existing long-gestation project loans, worth Rs.1,000 crore and more, and said a partial buyout of such loans by other financial institutions will be acceptable as a standard practice.

Earlier, the stipulation was that buyers should buy at least 50% of the loan from the existing banks. Now, they can pick up as low as 25% of the loan value and yet the loan will be treated as “standard”, or good in the books. A standard loan requires normal provisioning, against a “restructured” loan, which requires the bank to set aside 5% of the loan value as provision.

Bankers and analysts said this will give a good boost to the infrastructure sector.

“Normally people are not interested in buying infrastructure loans. Now we can sell 25% of it and the remaining 75% can be restructured and the repayment period can be extended. This will help the promoters as their repayment obligation comes down substantially,” said S.L. Bansal, chairman and managing director of Oriental Bank of Commerce.

According to Bansal, most of the power projects and road projects have ticket sizes of more than Rs.1,000 crore and these sectors will benefit immensely from these compensations.

However, for existing loans, the facility to refinance after a certain period will be available only once for the life of the project.

“Though these are significant easing on eligibility of take-out financing, as overall asset classification continues to remain standard, we expect it to have limited impact on the overall improvement of asset quality in near future as banks and other financial institutions would be selective and seek commercially viable projects only,” said an analyst with a private sector bank on condition of anonymity.

“However, as the economy shows signs of improvement led by improved returns on infrastructure projects, it could lead to significant uptick and thus ease asset quality issues from the infrastructure space,” the analyst said.

The central bank on 15 July had allowed banks to refinance their new project loans every five-seven years and said the repayment schedule can be stretched for the entire economic life of the project, which can reach even 20 years or more.

The idea was to give a boost to the infrastructure sector and ease the loan repayment burden on the promoters, who usually don’t break-even for a long time.

For existing loans, too, RBI in February had allowed a similar compensation, but had said the project must be taken over “substantially”— 50% or more—by another financial institution at the time of refinancing.

“The feedback received from banks shows that the above stipulation of substantial take-over of loans … is generally difficult to achieve, since a significant number of banks are already part of the consortium/multiple banking arrangement of such project loans,” the central bank said in a notification on its website.

Thus, RBI allowed banks to continue to treat the loan as “standard” and refinance it if other financial institutions take at least 25% of the loan and the promoters bring in additional equity, if required, “so as to reduce the debt to make the current debt-equity ratio and debt service coverage ratio of the project loan acceptable to the banks”.

According to analysts, hiking the promoters’ contribution part could be a problem area.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.