RBI project finance guidelines easier than draft, breather for lenders

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The Reserve Bank of India ( RBI ) has substantially reduced mandatory provision requirements for commercial real estate (CRE) and infrastructure projects, providing a breather to lenders and likely ensuring that the flow of funds especially to infrastructure projects continues.In the final guidelines released by the central bank on Thursday, RBI reduced general provisions required for CRE, CRE-RH (CRE-Residential Housing) and other infrastructure projects to between 1% to 1.25% in the construction phase from a peak of 5% in the draft guidelines. Provisions for projects in the operational phase have also been reduced to between 0.40% and 1%, with operational infrastructure projects provisions kept at 0.40%, the same as it is currently. The new guidelines will come into force from October 1.More importantly the new provisions are not applicable for existing projects, which would have substantially increased capital costs for lenders. Besides banks, infrastructure finance companies like Power Finance Corp and Rural Electrification Corp which together have amassed more than Rs 16 lakh crore of loans were likely to be most impacted from these new norms which were first proposed in May last year.A M Karthik, co-group head, financial sector ratings, ICRA Ltd said the final guidelines comes as a relief to the lenders, because the provision requirements for both operational as well as under construction projects are lower. 'Limited impact expected on NBFCs as sufficient provisions are provided as per the expected credit loss assessment and provisioning at present is closer to the requirement as per the guidelines. Also, the provisions are applicable prospectively, from Oct 2025 and, thus overall impact for lenders shall be limited," Karthik said.For loans on infrastructure projects which have been delayed beyond three years from the Date of Commencement of Commercial Operations (DCCO), lenders have to make a additional provision of 0.375% and a 0.5625% provision non infrastructure project loans (including CRE and CRE-RH), for each quarter of deferment, over and above the applicable standard asset provision, the RBI said. This is also lower than the penal provisions of 2.35% for infrastructure projects delayed by over two years prescribed by the draft guidelines.Lenders have been given the leeway of classifying projects in which the cost overrun including the interest payable during the construction phase is up to 10% of the original project cost or the stand by credit facility provided by lenders is specifically sanctioned by the lender at the time of financial closure or financial parameters like the debt to equity ratio, external credit rating remain unchanged or are enhanced in favour of the lender post cost overrun funding.A project where the DCCO extension is necessitated by an increase in the project outlay on account of increase in scope and size of the project is also been allowed to be classified as standard provided the rise in project cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay or a re-rating on the new external credit rating is not below the previous external credit rating by more than one notch.A project which is delayed has to complete all documentation, agreements between lenders and borrowers and comply with the cost overrun norms within 180 days from the end of the review period, failing which it will be classified as a non performing asset (NPA).

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