 "RBI eases infrastructure financing norms")
In a move aimed to at boost infrastructure financing, especially for the projects in roads and power sector, the Reserve Bank of India (RBI) has eased the norms for treating bank loans as secured finance even in the absence of collaterals.
The apex banks in its notification issued on March 18 pertaining to the prudential norms on advances to the infrastructure sector, has said that in case of PPP projects, the debts due to the lenders may be considered as secured to the extent assured by the project authority in terms of the Concession Agreement, if they meet certain conditions.
The conditions include that the user charges, toll, or tariff payments are kept in an escrow account where senior lenders have priority over withdrawals by the concessionaire and there is sufficient risk mitigation, such as pre-determined increase in user charges or increase in concession period, in case project revenues are lower than anticipated.
“In all such cases, banks must satisfy themselves about the legal enforceability of the provisions of the tripartite agreement and factor in their past experience with such contracts,” RBI has stressed.
A senior power ministry official said this relaxation would help the infrastructure projects in a big way as currently debt to such projects were not only costly but also considered risky.
“With this change, which has been brought based on the recommendations of the Deepak Parekh committee on infrastructure financing, will also help the new projects based on BOT basis, for which, the government is in the process of easing the norms further,” the official stressed.
Explaining the reason behind the move, RBI has also said, “It has been brought to our notice that most of the projects in India are user-charge based for which the Planning Commission has published Model Concession Agreements (MCAs). These have been adopted by various Ministries and State Governments for their respective public-private partnership (PPP) projects and they provide adequate comfort to the lenders regarding security of their debt”.
According to the RBI circular of April 17, 2009, on ‘Prudential Norms on Unsecured Advances’ rights, licenses, authorization, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) should not be reckoned as tangible security.
It had been observed, however, that infrastructure projects, especially road and highway projects, are special in nature where asset created by bank finance cannot be pledged or mortgaged to the bank but certain rights to receive annuities and toll collection from the assets can be hypothecated to the lenders.
In view of the above, banks have been allowed, through April 23, 2010, circular on ‘Prudential Norms on Advances to Infrastructure Sector’ to treat annuities under Build-Operate-Transfer (BOT) model in respect of road and highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities.
This is subject to the condition that banks’ right to receive annuities and toll collection rights is legally enforceable and irrevocable.
“The new RBI norms now has given lot of comfort to the banks for financing the infrastructure project as the whole definition of secured loan has been modified,” said the official.
The apex banks in its notification issued on March 18 pertaining to the prudential norms on advances to the infrastructure sector, has said that in case of PPP projects, the debts due to the lenders may be considered as secured to the extent assured by the project authority in terms of the Concession Agreement, if they meet certain conditions.
The conditions include that the user charges, toll, or tariff payments are kept in an escrow account where senior lenders have priority over withdrawals by the concessionaire and there is sufficient risk mitigation, such as pre-determined increase in user charges or increase in concession period, in case project revenues are lower than anticipated.
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Among other conditions, the lenders are required to have right of substitution in case of concessionaire default and also to trigger termination in case of default in debt service; and upon termination, the project authority has an obligation of compulsory buy-out and repayment of debt due in a pre-determined manner.
“In all such cases, banks must satisfy themselves about the legal enforceability of the provisions of the tripartite agreement and factor in their past experience with such contracts,” RBI has stressed.
A senior power ministry official said this relaxation would help the infrastructure projects in a big way as currently debt to such projects were not only costly but also considered risky.
“With this change, which has been brought based on the recommendations of the Deepak Parekh committee on infrastructure financing, will also help the new projects based on BOT basis, for which, the government is in the process of easing the norms further,” the official stressed.
Explaining the reason behind the move, RBI has also said, “It has been brought to our notice that most of the projects in India are user-charge based for which the Planning Commission has published Model Concession Agreements (MCAs). These have been adopted by various Ministries and State Governments for their respective public-private partnership (PPP) projects and they provide adequate comfort to the lenders regarding security of their debt”.
According to the RBI circular of April 17, 2009, on ‘Prudential Norms on Unsecured Advances’ rights, licenses, authorization, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) should not be reckoned as tangible security.
It had been observed, however, that infrastructure projects, especially road and highway projects, are special in nature where asset created by bank finance cannot be pledged or mortgaged to the bank but certain rights to receive annuities and toll collection from the assets can be hypothecated to the lenders.
In view of the above, banks have been allowed, through April 23, 2010, circular on ‘Prudential Norms on Advances to Infrastructure Sector’ to treat annuities under Build-Operate-Transfer (BOT) model in respect of road and highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities.
This is subject to the condition that banks’ right to receive annuities and toll collection rights is legally enforceable and irrevocable.
“The new RBI norms now has given lot of comfort to the banks for financing the infrastructure project as the whole definition of secured loan has been modified,” said the official.