RBI proposes floor for banks’ loan exposure for project finance

The Reserve Bank of India (RBI) on Friday proposed to set a floor for banks’ loan exposure for project finance for consortium lending and mandated 5 per cent standard asset in the construction phase.

The central bank, in the draft guidelines on the financing of project loans, said, “In projects financed under consortium arrangements, where the aggregate exposure of the participant lenders to the project is up to Rs 1,500 crore, no individual lender shall have an exposure which is less than 10 per cent of the aggregate exposure”.

For projects where the aggregate exposure of lenders is more than Rs 1,500 crore, this individual exposure floor shall be 5 per cent or Rs 150 crore, whichever is higher, it said.

For all projects financed by the lenders, the draft said, that banks must ensure that financial closure has been achieved and DCCO [date of commencement of commercial operation] is clearly spelt out and documented prior to disbursement of funds.

The lenders have to ensure that disbursal is proportionate to the stages of completion of the project. In the case of PPP projects, disbursement of funds should begin only after the declaration of the appointed date of the project.

The regulator has identified three stages of the project – design, construction and operational phase. The operational phase is the last phase which starts with the commencement of the commercial operation of the project. The draft norms proposed a general provision of 5 per cent of the funded outstanding to be maintained on all existing as well as fresh exposures on a portfolio basis.

A phased approach has been proposed for the provisioning of 5 per cent for standard assets during the construction phase. It has been proposed 2 per cent with effect from March 31, 2025 (spread over the four quarters of 2024-25), 3.50 per cent – with effect from March 31, 2026 (spread over the four quarters of 2025-26), and 5.00 per cent – with effect from March 31, 2027 (spread over the four quarters of 2026-27).

Typically, banks have to make 1 per cent or less for standard asset provisioning for most loans. The provisioning can be reduced to 2.5 per cent in the operational phase and further to 1 per cent of the funded outstanding provided that the project has a positive net operating cash flow that is sufficient to cover the current repayment obligation to all lenders, and total long-term debt of the project with the lenders has declined by at least 20 per cent from the outstanding at the time of achieving DCCO.

For accounts that have availed DCCO deferment and are classified as ‘standard’, and if the cumulative deferments are more than 2 years and 1 year for infrastructure and non-infrastructure projects, respectively, lenders have been asked to maintain additional specific provisions of 2.5 per cent over and above the applicable standard asset provision.

“This additional provision of 2.5 per cent shall be reversed on commencement of commercial operation,” the draft norms said.

Project finance accounts downgraded to the non-performing asset (NPA) can be upgraded after 360 days from the end of the review period, provided the review period has been successfully implemented, and no further diminution in fair value of the asset has happened and no further request for DCCO is made, it said.

Stakeholders can submit their comments on the draft norms by June 15.