Thursday, August 14, 2014

Flexible Structuring of Long Term Project Loans by bank for upto 25 years to Infrastructure and Core Industries

The Reserve Bank of India (RBI) has clarified that it would not have any objection to banks’ financing of long term projects in infrastructure and core industries sector provided that only term loans to infrastructure projects and projects in core industries sector, (viz., coal, crude oil, natural gas, petroleum refinery products, fertilizers, steel (Alloy + Non Alloy), cement and electricity - some of these sectors such as fertilizers, electricity generation, distribution and transmission, etc. are also included in the Harmonized Master List of Infrastructure sub-sectors) - will qualify for such e financing. At the time of initial appraisal of such projects, banks may fix an amortization schedule (Original Amortization Schedule) while ensuring that the cash flows from such projects and all necessary financial and non-financial parameters are robust even under stress scenarios. The tenor of the Amortization Schedule should not be more than 80% (leaving a trail of 20%) of the initial concession period in case of infrastructure projects under Public Private Partnership (PPP) model; or 80% of the initial economic life. The bank offering the Initial Debt Facility may sanction the loan for a medium term, say 5 to 7 years. This is to take care of initial construction period and also cover the period at least up to the date of commencement of commercial operations (DCCO) and revenue ramp up. The repayment(s) at the end of this period (equal in present value to the remaining residual payments corresponding to the Original Amortization Schedule) could be structured as a bullet repayment, with the intent specified up front that it will be refinanced by a set of banks. That repayment may be taken up by the same lender or a set of new lenders, or combination of both, or by issue of corporate bond, as Refinancing Debt Facility, and such refinancing may repeat till the end of the Amortization Schedule. Mere extension of DCCO would not be considered as restructuring subject to certain conditions, if the revised DCCO falls within the period of two years and one year from the original DCCO and the entire project debt amortization is scheduled within 85% of the initial economic life of the project or the concessional period. The Amortization Schedule of a project loan may be modified once during the course of the loan (after DCCO) based on the actual performance of the project. The above structure will apply to new loans to infrastructure projects and core industries projects sanctioned after the date of this circular.

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