RBI's draft project funding norms may create funding challenge: CareEdge

Reducing debt by 20% is seen as positive for demand-based projects, lowering risks from large repayments and refinancing

Reserve Bank of India’s (RBI) draft norms for project financing, if implemented, are likely to present funding challenges for both under-construction and operational infrastructure projects. A mandatory tail period accounting for 15 per cent of a project’s economic life will restrict the ability of infrastructure projects to secure additional top-up loans, according to rating agency CareEdge Ratings.  

It will necessitate an 8-10 per cent increase in equity requirements for Hybrid Annuity Model (HAM) based road projects to align the loan tenure with 85 per cent of the economic life for concessions lasting 15 years, said Rajashree Murkute, senior director at CareEdge Ratings.

Projects with stable cash flows, such as road annuities, transmission, and commercial real estate, typically see an improvement in credit profile within one year of establishing a payment track record from the counterparty.

Therefore, the mandate to reduce debt by 20 per cent to lower provisioning could delay the realisation of interest rate benefits for such operational projects, despite an enhanced credit profile.

Nonetheless, a compulsory 20 per cent debt reduction to achieve lower provisioning is considered a positive step for demand-based projects, as it mitigates the risks associated with bulky back-ended repayments and subsequent refinancing, Murkute said.