Draft Framework Released – Prudential Norms on Advances for Projects under Implementation

Brief Overview:

Draft Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances – Projects Under Implementation, Directions, 2024 (“Draft Framework”) are out. It is proposed that restructuring of exposures relating to projects under implementation on account of change in date of commencement of commercial operations (“DCCO”) which was not covered under the 2019 stressed assets framework.

Technical Details:

1) If there is an extension of DCCO in a project then the project finance account (“PFA”), shall be classified as standard in the following scenarios:

The cumulative deferment of DCCO to exceed 3 years and 2 years respectively for infrastructure and non-infrastructure projects (including commercial real estate projects).

2) In case of consortium financing, (a) if the aggregate exposure of the participant lenders to the project is up-to ₹1,500 crores then no individual lender is permitted to have exposure which is less than 10% of the aggregate exposure; and (b) if the aggregate exposure of lenders is more than ₹1,500 crores, the individual exposure floor shall be 5% or ₹150 crores, whichever is higher. However, sell downs/acquisitions are permitted subject to compliance Master Direction on Transfer of Loan Exposures as updated from time to time.

The Comments on the Draft Framework are invited from public/stakeholders by June 15, 2024.

Key Takeaways:

It appears that RBI is concerned with an ensuing project financing related credit boom and wants to pre-empt problems of the last cycle which led to quite a few banks being put under Prompt Corrective Action including government owned ones.

The proposed norms set out with an intention of being principle based and in some aspects end up being rather prescriptive.

RBI’s prescription of a minimum of 10% exposure for each lender for smaller projects and a minimum exposure of 5% (not less than 150 crores) for larger projects is interesting. Besides keeping out small lenders, it will also restrict the number of lenders till DCCO is achieved. This may be with an intention of only having large lenders with sophisticated project assessment ability doing project financing. This itself can have many implications. While this is as regards consortium financing, the restricting benefits are sought to be limited for all practical purposes, only to consortium financing.

The stipulation of provisioning of 5% for projects under implementation will increase the financing costs as it does raise the cost capital for lenders which will get passed on to the borrowers. Though this may be more so as regards smaller or less sophisticated borrowers. Hopefully, RBI will reconsider as regards its application to existing projects or at least reduce the quantum of the stipulated provisioning even though it is on a staggered basis.

Some of the stipulations and carve outs may end up including a form of sophisticated gold plating of *stated* capacity at the time of project appraisal and achieving Financial Closure.

The stipulation of elaborating the nature of disclosures by the lenders as regards restructurings approved is a good move. This will result in a qualitative enlargement of existing norms.

On the whole, the norms are largely positive from a long run perspective. They may result in some sort of shake up and hopefully the emergence of dedicated project financing players, as it used to be some decades back.

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