RBI allows banks to create stand by facility for cost overruns for project loans

Aug 14 2014, 21:31 IST
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The RBI also stipulated that the debt equity ratio as agreed at the time of initial financial closure should remain unchanged. Reuters The RBI also stipulated that the debt equity ratio as agreed at the time of initial financial closure should remain unchanged. Reuters
SummaryThe Reserve bank of India (RBI) on Thursday allowed banks to create a standby credit facility...

The Reserve bank of India (RBI) on Thursday allowed banks to create a standby credit facility in project financing to fund cost overruns if the date of commencement of commercial operations (DCCO) is delayed, without treating the loans as a restructured asset.

“Such ‘standby credit facilities’ are sanctioned at the time of initial financial closure; but disbursed only when there is a cost overrun. At the time of credit assessment of borrowers/project, such cost overruns are also taken into account while determining the project Debt Equity Ratio, Debt Service Coverage Ratio, Fixed Asset Coverage Ratio etc,” the RBI said in a release.

The apex bank said that lenders may fund additional ‘Interest During Construction’, which may arise on account of delay in completion of a project and other cost overruns (excluding Interest During Construction) up to a maximum of 10% of the original project cost.

The RBI also stipulated that the debt equity ratio as agreed at the time of initial financial closure should remain unchanged subsequent to funding cost overruns or improve in favour of the lenders and the revised debt service coverage ratio should be acceptable to the lenders. “Disbursement of funds for cost overruns should start only after the Sponsors/Promoters bring in their share of funding of the cost overruns,” the RBI added.

Earlier in May, the RBI allowed the revisions DCCO provided that the revised DCCO falls within the period of two years and one year from the original DCCO stipulated at the time of financial closure for infrastructure projects and non-infrastructure projects respectively. Such changes in the the start of commercial operations and consequent changes in repayment schedules will not be treated as restructuring. Banks had approached the RBI representing that funding of cost overruns, which may arise on account of extension of DCCO within the above time limits may be allowed without treating the loans as restructured.

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