On Wednesday, the Reserve Bank of India asked commercial banks to ensure that loans for infrastructure projects are not used for financing state government budgets. They noted that banks must not extend term loan to public sector units to substitute budgetary resources of state governments. ?The term loan could supplement the budgetary resources, if such supplementing was contemplated in the project design,? RBI said.
Whether such financing is done by way of extending loans or investing in bonds, banks and financial institutions should undertake due diligence on the viability and bankability of such projects to ensure that revenue stream from the project is sufficient to take care of the debt servicing obligations and that the repayment/servicing of debt is not out of budgetary resources, the central bank said. ?Further, in the case of financing of SPVs (special purpose vehicles), banks and financial institutions should ensure that the funding proposals are for specific monitorable projects,? RBI said.
The banks and FIs are advised to follow the instructions scrupulously, even while making investment in bonds of sick state PSUs as part of the rehabilitation effort.