The Telegraph
Since 1st March, 1999
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RBI carrot for infrastructure financing

Mumbai, Feb. 4: Relaxing the rules for core sector financing, the Reserve Bank (RBI) today allowed banks and financial institutions (FIs) to finance the acquisition of the promoter’s stake in a company involved in an infrastructure project. Moreover, banks can now issue guarantees favouring other lending institutions.

The central bank has also relaxed some of the prudential norms: credit exposure to borrowers belonging to a group may now exceed the exposure norm of 40 per cent of the bank’s capital funds by an additional 10 per cent (i.e up to 50 per cent), provided the additional credit exposure is for an infrastructure project.

Further, credit exposure to a single borrower may exceed the exposure norm of 15 per cent of the bank’s capital funds by an additional 5 per cent (i.e. up to 20 per cent) provided the additional credit exposure is on account of infrastructure.

According to the extant RBI instructions, banks are precluded from issuing guarantees favouring other banks/lending institutions for the loans extended by the latter, as the primary lender is expected to assume the credit risk and not pass on the same by securing itself with a guarantee.

“Banks are permitted to issue guarantees favouring other lending institutions in respect of infrastructure projects, provided the bank issuing the guarantee takes a funded share in the project at least to the extent of 5 per cent of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project,” the RBI added.

For financing of promoter’s equity, banks were earlier told that the promoter’s contribution towards the equity capital of a company should come from their own resources and the bank should not normally grant advances to take up shares of other companies. The RBI has now directed that under certain circumstances an exception may be made to this policy for financing the acquisition of the promoter’s stake in an existing company engaged in implementing or operating an infrastructure project in India.

This, however, has been allowed subject to various conditions. The RBI said that the bank finance would be only for acquisition of shares of existing companies providing infrastructure facilities.

Further, acquisition of such shares should be in respect of companies where the existing foreign promoters (and/or domestic joint promoters) voluntarily propose to disinvest their majority shares in compliance with Sebi guidelines, where applicable.

The companies to which loans are extended should, inter alia, have a satisfactory net worth. The company financed and the promoters/directors of such companies should not be defaulter to banks/FIs.

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