New infra funding norms: RBI does its part to boost growth; now ball in the govt's court

The Reserve Bank of India (RBI)’s decision to permit banks to refinance existing, long gestation, large value infrastructure projects under flexible conditions can offer significant relief to the sector.

The new RBI norms basically allow banks to align the repayments of term loans above Rs 500 crore of large companies in sync with their cash flows.

A bank can thus offer an infrastructure loan for a period of 25 years but refinance the loan after a period of, say, 5 or 7 years with revised pricing terms. Hence the scheme is called as 5:25 scheme.

The relaxation is indeed significant to the fund-starved sector to get stalled projects back on track. As on 31 October, Indian banks have an exposure of Rs 8.8 lakh crore to the infrastructure sector that includes projects in power, telecommunications and roads projects, which grew from Rs 7.8 lakh crore in the year-ago period.

Of the total chunk, power is the largest constituent, with an outstanding of Rs 5.3 lakh crore. That apart, infrastructure loans figure top in the list of restructured loans under the corporate debt restructuring (CDR) mechanism, constituting about 20 percent of the total debt or Rs 52,982 crore.

In the recent years, banks have typically opted to recast infrastructure loans whenever signs of stress emerge, instead of classifying them as non-performing assets (NPAs) to reduce the burden on their balance sheets.

That’s because banks need to set aside more money to cover bad loans in the form of provisions compared with the restructured loans. Under norms, provision on bad loans can range from 20 percent to 100 percent depending upon the status of the loan, while that on fresh restructured loans is 5 percent. This resulted in huge pile of restructured loans in the infrastructure segment and relatively lower bad loans.

Most of these loans came under stress as projects got stuck due to various clearance delays. This results in failure of commissioning of the projects at the promised date, in turn, leading to cost overruns and delays in repayments to banks.

For banks too, funding long-gestation infrastructure projects have remained a pain due to their asset-liability mismatch, which refers to the cash flow mismatches when lenders are forced to fund long-gestation projects with short-term deposits. Even though funding still remain an issue, managing the existing stress can be a lot more easier for banks with the new RBI norms.

Here is how it can help. When banks restructure loans, either by extending the repayment period, by reducing the interest rate or offering additional funds to the firm, they need to provide for such loans.

The new RBI norms will technically enable banks to conduct some form of restructuring without tagging those loans as restructured loans.

“The RBI norms will help kick-start stalled projects and help banks reduce the stress on their balance sheets,” said Abhishek Kothari, analyst at Quant Capital.

Under the fresh RBI norms, the loan can be refinanced by the same lender or other lenders after the end of each refinancing period provided the residual dues are cleared by the company.

While doing such refinancing on a standard loan, the bank doesn’t need to treat the whole exercise as a loan recast, hence would be saved from the provisioning burden.

The refinancing can be continued if the company does default on payments. Even if it defaults, once the account comes out of NPA (non-performing asset) status, it will be eligible for refinancing in terms of these instructions.

The facility can be applicable for existing bad loan accounts as well even though such loan will continue to be treated as bad.

The critical point here is that the RBI has allowed banks to conduct this flexible restructuring facility to existing projects. This will highly benefit many existing infrastructure companies, who are struggling to meet their repayment obligations.

More importantly, this can help banks bring down the stress on their balance sheets arising out of burden of troubled infrastructure projects. Banks, however, are likely to choose for such restructuring only if they are convinced that a particular project is viable.

On the other hand, the RBI is also considering giving more flexibility to banks to take higher equity in stressed projects to enable them have more say in their operations. Presently, banks are allowed to take up to 10 per cent equity holdings in companies whose loans are being recast.

The central bank’s steps, together can give the much-needed relief to the infrastructure sector. At present, about 14 per cent of the total loans given by Indian banks are under the stressed category as of now.

To be sure, RBI alone cannot revive the infrastructure sector on its own. The efforts needed to be complemented by reforms from the part of government to make the clearance process easier, facilitate fresh investments and thus make these projects viable.