New RBI rules to ease longer tenure loans

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Minimum take-out financing requirement lowered to 25%

In a move that would help banks offer longer tenure loans along with maintaining asset quality, the Reserve Bank of India (RBI) on Thursday lowered the minimum takeout financing requirement for existing project loans to 25 per cent from 50 per cent. The revised norms allow banks to refinance their existing project loans by way of take-out financing, even without a pre-determined agreement with other lenders and fix a longer repayment period, subject to conditions.

Mentioning the conditions, the RBI said that the aggregate exposure of all institutional lenders to such a project should be minimum Rs 1,000 crore and it should have started commercial operation after achieving the date of commencement of commercial operation.

Moreover, the total repayment period should not exceed 85 per cent of the initial economic life of the project in the case of public-private partnership (PPP) projects.

Such loans should be ‘standard’ in the books of the existing banks at the time of the refinancing. Banks have to fix the repayment period by taking into account the life cycle of and cash flows from the project, and boards of the existing and new banks should be satisfied with the viability of the project.

The refinanced loans would continue to be standard assets and would not be considered as restructured loans in the books of existing as well as new lenders.

Take-out financing is a method of providing finance for longer duration projects of about 15 years by banks sanctioning medium-term loans for 5-7 years.

The loan will be taken out of books of the financing bank within pre-fixed period by another institution, thus preventing any possible asset-liability mismatch. After taking out the loan from banks, the institution could offload them to another bank or keep it.

The old norms stated that for partial take-out financing, new lenders have to take over more than 50 per cent of the outstanding loan by value from the existing lenders. The new notification said that a minimum of 25 per cent of the outstanding loan by value should be taken over by a new set of lenders from the existing financing banks.

“More than 50 per cent of the outstanding loan by value (stipulation of substantial takeover of loans) from the existing financing banks/financial institutions is generally difficult to achieve, since a significant number of banks are already part of the consortium/multiple banking arrangement of such project loans,” said the RBI notification.

The promoters should bring in additional equity, if required, so as to reduce debt to make the current debt-equity ratio and debt service coverage ratio (DSCR) of the project loan acceptable to the banks. The above facility will be available only once during the life of the existing project loans, said RBI.

Vibha Batra, senior vice-president, financial sector rating at Icra said, “The new norms could give a breather to thermal and hydro projects, which have economic life of more than 25 years, as well as to road projects with long gestation period. Typically, cash flows for such projects may be low in the initial phases due to low PLF (plant load factor) or low traffic respectively.”

“The longer tenure would help the borrowers align their cash flows with their debt repayment, and therefore reduce pressure on asset quality of banks,” Batra added.

Last month, the central bank allowed banks to issue long-term bonds for financing infrastructure project loans and affordable housing. These bonds would be exempted from regulatory reserve requirements such as cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority sector lending targets.

In addition to the incremental infrastructure and housing loans offered by banks, 16 per cent of the existing infrastructure loans too would be eligible to be financed from long-term bonds in FY 2015. So banks could tap bond market to finance their long-term assets.

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