RBI cautions banks/FIs on surrogate financing for projects

Reserve Bank of India has cautioned banks and financial institutions to ensure that loans and investments given to public sector units for funding infrastructure projects are not used for financing the Budget of the state governments.

In respect of projects undertaken by PSUs, banks and FIs can sanction term loans only for those registered under the Companies Act or a corporation established under the relevant statute, RBI said in a circular in Mumbai.

RBI sources on Thursday said the state finance secretaries have been highlighting this issue of surrogate financing in the bi-annual meeting with the apex bank.

RBI in the circular to banks and FIs said such term loans should not be in lieu of or to substitute budgetary resources envisaged for the project and could supplement these resources if it was contemplated in the project design.

The apex bank said such PSUs may include special purpose vehicles registered under the Companies Act set up for financing infrastructure projects.

Whether such financing was done by way of extending loans or bonds, they should undertake due diligence on viability and bankability of such projects to ensure that revenue stream was sufficient to take care of debt servicing obligations and repayment servicing was not out of budgetary resources.

For SPVs, it should ensure funding proposals were for specific projects other than those being implemented by states in view of the fact that their borrowings for budgetary purpose were met by banks and FIs by contributions to their approved market borrowing programmes.

RBI also advised banks and FIs to undertake due diligence on viability and bankability of infrastructure projects financed through term loans or bonds issued by government-owned entities to ensure efficient utilisation of resources and creditworthiness of these projects.

Banks should also ensure that individual components of financing and returns on the project were well defined and assessed, RBI said.

Lending and investment decisions in such cases should be based solely on their commercial judgment, it said adding, only projects that are intrinsically viable be financed.

RBI said no compromise should be made on proper credit appraisal and close monitoring of these projects.

State government guarantees may not be taken as substitute for satisfactory credit appraisal and such requirements should not be diluted on the basis of any reported arrangement with RBI or any bank for regular standing instructions and periodic payment instructions for servicing the loans or bonds.

Banks would be permitted to issue guarantees favouring other lending institutions, provided it takes a funded share in the project at least to the extent of five per cent of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project.

The additional exposures of 10 per cent in group exposure limit presently restricted to projects in - roads, power, telecommunications and ports - may be extended to projects in all infrastructure sectors.

PTI

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