RBI gives more leeway to banks on debt recast

Banks have been given more flexibility in rescheduling or restructuring loans given to projects that have been delayed due to legal disputes or extraneous factors such as absence of government approvals.

In a circular this evening, the Reserve Bank of India (RBI) allowed banks to treat project loans to infrastructure companies that had been delayed by up to four years due to legal disputes as standard assets. Earlier, this was available for a delay up to two years from the scheduled completion date.

In case of delays due to extraneous factors, a project loan can now be treated as a standard asset for delays up to three years, instead of the two years prescribed at present.

For non-infrastructure projects, where RBI had permitted banks to treat a project loan as a standard asset for delays up to six months from the date of the commencement of commercial operations, the limit has been extended up to one year.

At the time of sanctioning a loan, banks have to fix a date for commencement of commercial operations while sanctioning a loan. The moment the deadline is missed, the loan has to be classified as sub-standard, even if the principal and interest are regularly serviced. The guidelines were put in place as substantial time overruns often affected the viability and quality of projects.

But over the years, the guidelines were relaxed in the wake of problems in land acquisition, environmental clearances and other approvals, especially from state governments.

In case of infrastructure projects, according to the revised norms, when a loan is classified as a standard asset, banks have been allowed to provide 0.4 per cent of the principal amount in case there is a delay of up to two years from the date of commencement of commercial operations. In the third and the fourth year, the provision requirement will be 1 per cent.

For industrial project loans, in the first six months from the date of commencement of commercial operations, the provision requirement will be 0.4 per cent, which will rise to 1 per cent during the next six months.

For sub-standard assets, banks have to initially provide 10 per cent and then increase it.