Liberalizing borrowing norms for infrastructure

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe
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The Reserve Bank of India (RBI) classifies non-banking financial companies (NBFC) into three categories: asset finance companies, loan companies and investment companies. All three types of NBFC are expected to maintain a minimum capital adequacy ratio of 12%.

New category

In light of the predominant role played by infrastructure financing NBFCs in recent times, in making available lines of credit to the infrastructure sector, a need has emerged for a separate class of infrastructure financing NBFCs.

The RBI, having accepted the need for a separate category of infrastructure financing NBFCs, has in a notification dated 12 February amended the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007.

Shardul Thacker Partner Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Partner
Mulla & Mulla & Craigie Blunt & Caroe

Defining IFCs

According to the amended directions, an infrastructure financing company (IFC) would be construed as a non-deposit taking NBFC that fulfils the criteria stipulated by the RBI.

The RBI has directed that an IFC is required to deploy a minimum of 75% of its total assets in infrastructure loans.

Under the directions, this encompasses credit facilities extended by NBFCs by way of term loans, project loans, subscription to bonds, debentures, preference shares and equity shares in a project company acquired as a part of the project finance package or any other form of long-term funded facility.

Eligible borrowers

Such loans may be made available to companies engaged in developing or operating and maintaining, or developing, operating and maintaining any infrastructure facility including a project in any of the following sectors:

a) roads, including toll roads, bridges or rail systems;

b) highway projects;

c) ports, airports, inland waterways or inland ports;

d) water supply projects, irrigation projects, water treatment systems, sanitation and sewerage systems or solid waste management systems;

e) telecommunication services (basic or cellular);

f) industrial parks or special economic zones;

g) generation or generation and distribution of power;

h) transmission or distribution of power by way of a network of new transmission or distribution lines;

i) construction projects involving agro-processing and supply of inputs to agriculture;

j) construction for preservation and storage of processed agro products and perishable goods;

k) construction of educational institutions and hospitals; and

l) any other infrastructure facility of a similar nature.

Meeting thresholds

Further, such IFCs are required to have net owned funds of Rs3 billion (US$67 million) or above with a minimum “A” credit rating or equivalent rating from Crisil, Fitch, Care, Icra or an equivalent reputed accrediting rating agency.

Unlike banks, which have to maintain a capital adequacy ratio of 9%, the cap on the capital adequacy ratio to be maintained by IFCs has been set at 15%, of which at least 10% should comprise tier one capital (equity and disclosed reserves).

Lending obligations

IFCs are not mandated to comply with the credit norms stipulated in the directions and are permitted to lend 10% of their owned fund to any single borrower and 15% of their owned fund in case of a single group of borrowers.

Further, IFCs are also exempt from the restriction limiting single party exposure to 5% of their owned fund and group exposure to 10% of their owned fund.

Companies complying with the above criteria may apply to the RBI for classification as an IFC.

Need for funding addressed

Recognizing the need for funding the infrastructure sector on a long-term basis and with a view to beneficially regulate India’s credit system, the RBI introduced IFCs as a new category of NBFCs for creating an environment to liberalize borrowing norms in the infrastructure sector.

Sustained momentum

In the coming years, the infrastructure sector is expected to grow consistently and continuously thereby realizing India’s growth momentum with sustained competitiveness.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.

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