RBI eases lending norms for infrastructure sector

The change of guard at the helm of the largest democracy in the world has raised hopes of change for all including those focused primarily on the infrastructure sector. In a bold move, the finance minister of India, Arun Jaitley, in the government’s maiden budget, set the tone for a regulatory framework to revitalize the scenario of infrastructure financing in the country.

Operational guidelines

Pursuant to the finance minister’s speech, the Reserve Bank of India (RBI) has issued instructions in the form of operational guidelines specifying the norms for infrastructure financing in India. These instructions were issued with the objective of mitigating the asset-liability management problems faced by Indian banks in extending long-term project loans to infrastructure and core industry sectors and to ease the burden of raising long-term debt for project loans to infrastructure sectors.

From now on, banks will be more inclined to schedule longer amortization periods for project loans given that a definitive regulatory framework for infrastructure financing appears to have been put in place. New loans to infrastructure projects and core industries can be split in a 5/25 structure where banks can fix the amortization period for a 25-year term, but structure it as a five to seven year loan with an option to roll it over at the end of that period.

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The bank offering the initial debt facility would normally cover the period up to the commencement of commercial operations of the project. The repayment of the initial debt facility may be by way of “bullet” repayment at the end of each refinancing period (although the intent of such repayment has to be specified upfront). The existing bank or a new bank or a combination of both can participate in the refinancing, which can be rolled over until the end of amortization schedule. The banks can also issue corporate bonds for such repayment.

Loan tenor

While the economic life of infrastructure and core industry sector projects in India is usually 25-30 years, the tenor of a domestic loan in these sectors is typically 10-12 years or less, with a two to three year reset clause (in spite of the life of the underlying asset being much longer), which leads to front-loading of loan repayments during the initial years of the project cycle. As a resultant, higher repayment instalments are fixed for the project. This not only leads to increased levels of stress in the repayment of the project loans but also impairs the ability of the project developers to generate fresh equity out of internal accruals for further investments, as revenues from a project typically grow as the project matures.

The new framework will give more confidence to the lending institutions as periodic refinancing (of balance debt in infrastructure and core industry sectors) has, effectively, been made mandatory thereby ensuring that distribution of risk portfolio though risk mitigation (from a financier’s perspective) and continuous access to long-term funds (from a developer’s perspective) will be contingent on prudent and efficient refinancing arrangements being in place.

Bond issues

The RBI has also permitted the banks to raise long-term funds for financing of long-term projects in infrastructure and loans for affordable housing by issue of long-term unsecured, redeemable and fully paid bonds denominated in rupees with a floating or fixed rate of interest and a minimum maturity of seven years in “plain vanilla form”, without a call or put option. Previously, banks were allowed to issue long-term bonds with a minimum maturity of five years to the extent of their exposure of residual maturity.

The funds raised by banks through these long-term bonds will be subject to minimum mandatory regulatory norms such as cash reserve ratio, statutory liquidity ratio and priority sector lending norms, which effectively leads to lower fund costs for banks. The issue of these bonds can be through a public issue or private placement. The incentive of statutory pre-emption will be provided only to bonds issued to finance long-term projects in infrastructure and loans for affordable housing.

In order to facilitate investment from non-banking sectors and to accelerate liquidity in this segment, the RBI has clarified that banks will not be allowed hold and trade in bonds (that qualify for exemption from reserve requirements) issued by other banks.

Conclusion

With high investment targets set for the infrastructure sector in the 12th Five-Year Plan (2012-17) – a major portion of which is envisaged to be through private sector participation via the public-private partnership model – these instructions certainly seem to address major factors that have contributed to sluggishness in the economy, thereby setting an agenda to accelerate economic growth.

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Khaitan Sud & Partners is a fast growing law firm providing specialist legal services to both domestic and international clients. Bhumika Tripathi is an associate at the firm.