PROJECT FINANCE DEFAULTS - RBI WARNING TO BANKS

The Reserve Bank of India (RBI) has raised concerns over the high level of defaults in the project finance portfolio of banks. The banks usually follow a system where the borrower has to bring in the margin fund upfront after which the bank disburses the line of credit. A promoter has to shell out a margin of around 15 to 50 per cent of the project cost. The promoter may be required to bring in only a portion of this upfront and thereafter, on a pro-rata basis, with each time the bank releases funds the promoter brings in his portion. In case, the borrower is unable to bring in his portion, the banks may ask the borrower to bring in another promoter or acquire equity in the project. However, as the investment is locked up, the banks are forced to release funds to keep the project going without insisting on the borrower bringing in the margin upfront for select projects.