RBI Proposes Minimum Threshold for Bank Loan Risks in Project Finance

The Reserve Bank of India (RBI) proposed setting a limit for banks’ loan exposure and making mandatory 5% standard asset for project financing consortium loans on Friday.

Central Bank said in the draft guidelines for project loans, “Under the syndicated arrangement, where the total exposure of partner lenders is up to Rs 1,500 crore, no individual lender’s exposure will exceed 10% of the total exposure, which is less than 10% of the total exposure.” It has been said that for those projects where the total exposure of lenders is more than Rs 1,500 crore, this individual exposure floor will be 5% or Rs 150 crore, whichever is higher.

The draft said that for all projects funded by lenders, banks must ensure that financial closure has been achieved and a Deed of Completion [commencement of commercial operations] is clearly written and documented before the distribution of funds.

Borrowers must ensure that disbursements are made in proportion to the stages of project completion. A phased approach is proposed for standard assets for construction phase at 5%. It has been proposed to make it effective from March 31, 2025 (spread over four quarters of 2024-25), 3.50% – effective from March 31, 2026 (spread over four quarters of 2025-26), and 5.00% – effective from March 31, 2027 (spread over four quarters of 2026-27).

Generally, banks have to make a provision for standard assets for most loans at 1% or less. The provision can be reduced to up to 2.5% during the operational phase and reduced by up to 1% of the funded amount, provided there is a positive net cash flow in the project to cover the current repayment obligations of all borrowers, and the total tenure – the project has been reduced by at least 20% from the outstanding amount at the time of receiving the DCCO

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