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RBI extends 5:25 scheme to some existing infrastructure projects

Livemint:  December 17, 2014

Mumbai: In a major boost for the infrastructure sector, as well as for banks financing long gestation projects, the Reserve Bank of India (RBI) on Monday extended its flexible refinancing and repayment option for long-term infrastructure projects to existing ones where the total exposure of lenders is more than Rs.500 crore.

The option will also be available for projects that have already been classified as bad debt or stressed, but it will treated as “restructuring” and the project will continue to be termed non-performing till the project gets upgraded after satisfactory performance on servicing the loans.

The central bank had first introduced this flexible financing scheme in July. Popularly known as the 5:25 scheme, it allows banks to extend long-term loans of 20-25 years to match the cash flow of projects, while refinancing them every five or seven years. Existing projects were not initially covered under the scheme.

Until now, banks were typically not lending beyond 10-12 years. As a result, cash flows of infrastructure firms were stretched as they tried to meet shorter repayment schedules.

In a notification on its website on Monday, the central bank said banks can now fix fresh loan amortization schedules for existing projects without such exercise being treated as restructuring. This is important for banks, since from April, any freshly restructured asset will be considered as bad debt and they will have to set aside a minimum of 15% provision against such loans.

A restructuring exercise is similar because the lenders typically extend the repayment schedule. It will save banks additional provisioning.

“This is a major step taken to boost infrastructure in the country,” said Santosh Nayar, head of state-run India Infrastructure Finance Co. Ltd.

“In India, we are not following the correct project lending practice. With this change in rule, cash flows will match the repayment schedule and long-term infrastructure projects will become viable,” said Nayar.

Data to gauge the benefit of these norms is difficult to get, but some indicative numbers point towards a big relief for industry and banks. As on 31 October, banks’ outstanding exposure to the infrastructure sector was at Rs.8.88 trillion. Of course, it is not clear how much of it is above Rs.500 crore, but most of the infrastructure sector projects are more than that size.

Five sectors—infrastructure, iron and steel, textiles, aviation and mining—together contribute 24% to total advances of commercial banks, and account for around 53% of their total stressed advances, according to RBI data.

“Infrastructure companies couldn’t have asked for anything better at his point,” said Subba Rao Amarthulu, group chief financial officer at RPG Enterprises.

“This a great opportunity for companies for revival and survival. There will be phenomenal cash flow savings, at a time when cash flows of many infra companies are stressed. It is a big relief for infrastructure companies and adds to the viability of the project,” he said.

RBI’s decision to allow such flexible refinancing even for assets already qualified as bad loans too is expected to help. According to Nirmal Gangwal, managing director of Brescon Corporate Advisors (P) Ltd, a financial advisory firm advising infrastructure companies, such a restructuring facility will ease banks’ asset quality pressures.

“Earlier, once a project became an NPA (non-performing asset), banks had no clue what to do. Ultimately, banks used to sell the assets to asset reconstruction firms or got engaged in lengthy litigation process and recovering very little of their dues. Now, banks and the lenders can now sit together for a constructive dialogue on projects,” Gangwal said.

“No project is unviable in India. Only the repayment schedule was unviable for the companies. You cannot pay a loan in 10 years in which the cash flow will come in 20-25 years,” said Gangwal.

RBI, in its notification, said the amortization schedule should be within 85% of the initial concession period of the projects, and banks should be sure about the cash flow generation capabilities of the projects. If there is a project where the repayment period has been stretched or there have been defaults, banks should immediately stop refinancing such loans, RBI said.

Further, the central bank cautioned banks to recognize the risk that it may not always be possible to refinance such loans.

“Banks should recognize from a risk management perspective that there will be a probability that the loan will not be refinanced by other banks, and should take this into account when estimating liquidity needs as well as stress scenarios,” said RBI, adding that banks may determine the pricing of the loans at each stage of the project term loan or refinancing debt facility, commensurate with the risk at each phase of the loan.

Along with allowing banks to offer more flexible loan terms to infrastructure firms, RBI has also allowed them to raise long-term assets to avoid asset-liability mismatches. In July, RBI exempted funds raised via long-term infrastructure bonds from regulatory requirements such as the cash reserve ratio and the statutory liquidity ratio. Since then, quite a few banks, including ICICI Bank Ltd, have raised money through such long-term infrastructure bonds, while others have indicated that they may raise such funds once loan demand from the infrastructure sector picks up.

“This is a very good mechanism for the infrastructure industry. Most banks did not have the appetite to enter the distressed sector right now, so we were looking forward to some solution from the regulator. This is a big relief to infrastructure firms and this will definitely elevate the industry,” said Madhu Terdal, chief financial officer, GMR Group.

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