The Reserve Bank of India (RBI) has proposed tighter rules to govern lending to projects under implementation, including a higher provisioning of up to 5% during the construction phase, even if the asset is standard.

The central bank’s draft guidelines, issued Friday on the financing of project loans, says, “In projects financed under consortium arrangements, where the aggregate exposure of the participant lenders to the project is up to Rs 1,500 crore, no individual lender shall have an exposure which is less than 10% of the aggregate exposure”.

For projects where the aggregate exposure of lenders is more than Rs 1,500 crore, this individual exposure floor shall be 5% or Rs 150 crore, whichever is higher, it said.

Incidentally, project loans in the last credit cycle were seen to have led to a build-up of stress on bank books. The standard asset provisioning otherwise stands at 0.40%.

The draft rules classify the projects as per their phase.  The regulator has classified three stages of the project – design, construction and operational phase. Banks financing such projects must ensure that financial closure has been achieved and DCCO [date of commencement of commercial operation] is clearly spelt out and documented prior to disbursement of funds.

Under the proposed norms, a bank has to set aside 5% of the exposure during the construction phase, which goes down as the project becomes operational.

For projects reaching the 'operational phase', the provisions can be reduced to 2.5% of the funded outstanding and then further down to 1% if certain conditions are met.

These include the project having a positive net operating cash flow that is sufficient to cover current repayment obligation to all lenders, and the total long-term debt of the project with the lenders has declined by at least 20% from the outstanding at the time of achieving DCCO.

For accounts that have availed DCCO deferment and are classified as ‘standard’, and if the cumulative deferments are more than 2 years and 1 year for infrastructure and non-infrastructure projects, respectively, lenders have been asked to maintain additional specific provisions of 2.5% over and above the applicable standard asset provision.

“This additional provision of 2.5% shall be reversed on commencement of commercial operation,” the draft norms said.

The proposed guidelines also spell out details on stress resolution, specify the criteria for upgrading accounts and invoke recognition.

Project finance accounts downgraded to the non-performing asset (NPA) category can be upgraded after 360 days from the end of the review period, provided the review period has been successfully implemented, and no further diminution in fair value of the asset has happened and no further request for DCCO is made, it said.

It expects lenders to maintain project-specific data in an electronic and easily accessible format.

Lenders will update any change in the parameters of a project finance loan at the earliest but not later than 15 days from such change. The necessary system in this regard will be put in place within three months of the release of these directions, it said.

Stakeholders have been given time till 15 June to respond to the proposals.