Infrastructure financing Prudential Requirements

The relevant prudential requirements as recommended by the RBI regarding infrastructure financing are as follows:

Prudential credit exposure limits: Credit exposure to borrowers belonging to a group may exceed the exposure norm of 40 percent of the bank’s capital funds by an additional 10 percent (i.e. up to 50 percent), provided the additional credit exposure is on account of extension of credit to infrastructure projects. Credit exposure to a single borrower may exceed the exposure norm of 15 percent of the bank’s capital funds by an additional 5 percent (i.e. up to 20 percent) provided the additional credit exposure is on account of infrastructure.

Assignment of risk weight for capital adequacy: Banks may assign a concessional risk weight of 50 percent for capital adequacy purposes on investment in securitized paper pertaining to an infrastructure facility, subject to compliance with the following conditions:

1) Conditions as specified above for financing pre-members equity.
2) The infrastructure facility should generate income / cash flows, which would ensure servicing /repayment of the securitized paper.
3) The securitized paper should be rated at least ‘AAA’ by the rating agencies, and the rating should be current and valid.
4) The rating will be deemed to be current and valid if it is not more than one month old on the date of opening of the issue, the rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and the rating letter and the rating rationale is a part of the offer document. In the case of secondary market acquisitions, the ‘AAA’ rating of the issue should be in force and confirmed from the monthly bulletin published by the respective rating agency.
5) The securitized paper should be a performing asset in the books of the investing / lending institution.

Asset liability management: The long term financing of infrastructure projects may lead to asset liability mismatches, particularly when such financing is not in conformity with the maturity profile of a bank’s liabilities. Banks would, therefore, need to exercise due vigil on their asset liability position to ensure that they do not run into liquidity mismatches on account of lending to such projects.

Administrative arrangements: Timely and adequate availability of credit is the pre-requisite for successful implementation of infrastructure projects. Banks / FIs should, therefore, clearly delineate the procedure for approval of loan proposals and institute a suitable monitoring mechanism for reviewing applications pending beyond the specified period. Multiplicity of appraisals by every institution involved in financing, leading to delays has to be avoided and banks should be prepared to broadly accept technical parameters laid down by leading public financial institutions. In the same manner, setting up a mechanism for continuous monitoring of the project implementation will ensure that the credit disbursed is utilized for the purpose for which it was sanctioned.

Recent Developments:

In the budget announcements made by the finance minister, a new concept in infrastructure financing has been introduced. This is called public private partnership for infrastructure funding. According to the new concept, public investment in an infrastructure project will be critical while the private sector will be encouraged to participate in a big way through some innovative moves. This implies that public money will be leveraged more meaningful through private partnership. This arrangement will facilitate a more equitable risk sharing by the government with the private sector.