RBI’s Proposed Framework for Project Financing

Source-This post on RBI’s Proposed Framework for Project Financing has been created based on the article “RBI’s proposed framework to administer project financing” published in “The Hindu” on 23 May 2024.

Why in News?

Recently the RBI released draft regulations for consultation to enhance the regulatory framework for financing projects with long gestation periods in infrastructure, non-infrastructure, and commercial real estate sectors.

About RBI’s Proposed Framework for Project Financing

1. The Reserve Bank of India (RBI) has released draft regulations to enhance the regulatory framework for financing long-gestation projects in infrastructure, non-infrastructure, and commercial real estate sectors.

2. Purpose of the Framework: To address the high financial risks associated with infrastructure projects, which often experience long delays and cost overruns due to various obstacles like land acquisition and regulatory clearances.

4. Key Revisions Proposed:

a) Increase in general provisioning for potential losses during the construction phase from 0.4% to 5%, to be implemented in a phased manner.

b)  Focus on preventing defaults or extensions in the Date of Commencement of Commercial Operations (DCCO) and managing reductions in the Net Present Value (NPV) of projects.

Note: Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

c) The framework mandates that all critical prerequisites, including environmental, regulatory, and legal clearances, be met before financial closure.

d) Continuous monitoring and independent certification of project progress

e)  Mandating a positive NPV at the outset and annual re-evaluation to prevent stress build-up and ensure proactive management.

f) The original or revised repayment schedule, including any moratorium period, should not exceed 85% of the project’s economic life.

g) Introduction of guidelines for a standby credit facility sanctioned at the time of financial closure to address potential overruns due to project delays.

5. The DCCO should be clearly defined, and financial disbursements should align with the stages of project completion.

6.  The higher provisioning requirement could impact the short-term profitability of non-banking financial companies and infrastructure financiers.

UPSC Syllabus: Indian Economy