RBI eases norms for infra debt funds to refinance project loans

In a move that will ease flow of funds to the infrastructure sector, the Reserve Bank of India (RBI) on Tuesday permitted finance companies working as infrastructure debt funds (IDFs) to refinance projects that are not running as public-private partnerships (PPP) as well.

At present, non-banking financial company (NBFC) infra debt funds can refinance only to PPP infrastructure projects under a tripartite agreement involving the project authority. According to bankers and executives with IDFs, RBI's move is positive since more infrastructure projects will be eligible for refinance.

RBI, in its monetary policy statement, said it is proposing to allow NBFC-IDFs to provide take-out finance for infrastructure projects that have completed one year of operation in the PPP segment without a tripartite agreement and to the non-PPP segment, subject to certain conditions. Detailed guidelines will be issued later.

IDF executives said non-PPP projects would also get the benefit of lower cost of funds. Also, doing these transactions will take less time. This move is also expected to indirectly help in development of the bond market since project companies issue bonds to IDFs for refinancing. IDFs also raise money from the market via bonds for business operations.

The central bank might prescribe rules for risk management under regulations. They might be about the risk management (risk weights) for exposure that IDFs take. The current norms prescribe 50 per cent risk weight for PPP projects. The regulator might also revise ceiling on single party exposure. At present, IDFs can take exposure up to 60 per cent of their net worth.

There will be relief for banks as well. The proposed move would also mean more loans would churn through refinance, releasing room for banks to take additional loans. It would also bring down their single company exposures within prescribed norms.

In a bank-dominated economy like India, the onus has always been on the banking system to finance the infrastructural needs of the economy. The sector as a whole and more specifically, the public sector banks (PSBs) as a group, have been meeting those expectations.

Outside of budgetary support, which accounts for about 45 per cent of the total infrastructure spending, commercial banks are the second largest source of finance for infrastructure (24 per cent), according to RBI.

Banks’ exposure to the infrastructure sector as a percentage of total advances has gradually increased from 11.8 per cent in March 2010 to 15.62 per cent in September 2014 at the system level. For PSBs, this share has moved even higher from 13.5 per cent in March 2010 to 17.57 per cent in September 2014.