RBI Draft Guidelines for Project Financing

10 Questions

What is the primary characteristic of endogenous risks in a project?

Deficiencies in planning and execution capabilities of the project sponsor

What is the minimum percentage of total project cost that should be accounted for by the capital structure to achieve financial closure?

90%

What is the primary purpose of the design phase of a project?

To obtain all necessary clearances and approvals for the project

What is the term for interest accrued and capitalized during the construction phase of a project?

Interest During Construction (IDC)

What is the minimum percentage of land availability required for infrastructure projects under the PPP model to achieve financial closure?

50%

What is the primary purpose of the draft guidelines issued by the RBI on May 03, 2024?

To provide a harmonised prudential framework for financing of projects in Infrastructure, Non-Infrastructure and Commercial Real Estate sectors

What is the deadline for submitting comments on the draft guidelines?

June 15, 2024

What is the 'Appointed Date' as defined in the concession agreement?

The date defined in the concession agreement between the concessionaire and the concession granting authority

What is one of the conditions that would lead to a credit event?

If there is a default or a need for infusion of additional debt

What is the DCCO for Commercial Real Estate (CRE) projects?

The date on which Occupancy Certificate from the competent authority is obtained

Study Notes

RBI Draft Guidelines for Project Finance

The RBI issued draft guidelines on May 3, 2024, to provide a harmonized prudential framework for financing projects in Infrastructure, Non-Infrastructure, and Commercial Real Estate sectors.

Key Definitions

Appointed Date: The date defined in the concession agreement between the concessionaire and the concession granting authority (applicable only to infrastructure projects under PPP model).
Credit Event: Occurs when there is a default, need for DCCO extension, need for additional debt, or diminution in project's NPV.
Date of Commencement of Commercial Operations (DCCO): The date when the project is put to commercial use, and completion certificate/provisional completion certificate is issued (for CRE projects, it's the date of Occupancy Certificate).
Date of Financial Closure: The date when the project's capital structure, including both equity and debt, becomes legally binding on all stakeholders, and all applicable approvals/clearances are obtained.
Endogenous Risks: Risks arising from deficiencies in planning/execution capability of the project sponsor/concessionaire, leading to cost overruns, time overruns, change in ownership, etc.
Exogenous Risks: Risks external to a specific project, affecting the economy or sector, such as natural calamities, pandemic, or change in government policy/regulation/law.

Phases of Project

Design phase: Conception to financial closure, including designing, planning, and obtaining clearances/approvals.
Construction phase: From financial closure to the day before DCCO.
Operational phase: From commencement of commercial operation.

Prudential Conditions for Project Finance

Lenders must have a Board-approved policy for resolving stress in projects on occurrence of a credit event.
All mandatory pre-requisites, such as land availability and statutory clearances, must be in place before financial closure (except for infrastructure projects under PPP model, where 50% or more land availability is considered sufficient).