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RBI’s Project Financing Framework
Context
The Reserve Bank of India (RBI) recently issued draft regulations to enhance the regulatory framework for long-term project financing, targeting sectors like infrastructure, non-infrastructure, and commercial real estate. These regulations aim to create a "harmonized prudential framework" for financing such projects and propose revising the criteria for the date of commencement of commercial operations (DCCO).
Purpose of the Project Financing Framework
- Infrastructure projects often have long gestation periods, making them financially risky and challenging to fund solely through government resources.
- This necessitates public-private partnerships and project financing from domestic financial institutions, particularly for projects with longer payback periods.
- Delays are often due to issues like land acquisition and environmental clearances, while cost overruns stem from underestimating original costs and high costs for environmental and rehabilitation measures.
Key Revisions in the Framework
- Provisioning: The framework suggests increasing the general provision at the construction stage from 0.4% to 5% of exposures. This increase will be phased in, starting with 2% in FY25, 3.5% in FY26, and 5% in FY27. Once the project reaches the operational phase, provisioning can be reduced to 2.5% and then to 1%, provided the project meets certain financial criteria.
- Pre-requisites for Financing: The framework mandates that all necessary environmental, regulatory, and legal clearances must be in place before financial closure. For PPP projects, at least half of the stipulated land must be available.
- Disbursal and Monitoring: Financial disbursals are to be linked to project completion stages, with PPP disbursals beginning only after the developer receives the contract. Banks must deploy independent engineers or architects to certify progress.
- Net Present Value (NPV): A positive NPV is required to obtain project finance, and lenders must independently re-evaluate the project's NPV annually.
- Repayment Norms: The repayment tenure, including the moratorium period, should not exceed 85% of the project's economic life. Changes in repayment schedules due to increased project costs must be reassessed for viability before commercial operations commence.
- Standby Credit Facility: A standby credit facility for funding cost overruns due to delays, allowing for incremental funding of up to 10% of the original project cost.
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