Project Refinance Contracts Now Come With Rate Revision Clauses

The clauses stipulate that lenders will be allowed to hike the lending rate on refinancing if the Reserve Bank of India's project finance draft regulations are finalised, said the people on the condition of anonymity.

These clauses will account for the higher provisioning cost on project loans once the regulator's norms are finalised, the first of the three people mentioned above told NDTV Profit.

In May, the RBI issued a draft paper on project financing by banks and non-bank lenders, where the standard asset provisioning on such loans was raised from 0.4% to 5%, in the initial phase. These provisioning requirements will apply to existing and new projects alike, if the norms are finalised.

For existing projects, the elevated provisioning would be implemented in a phased manner over three years, till March 2027.

Companies seeking refinancing on their existing debt obligations are agreeing to such clauses as they are unable to find cheaper sources of funding, the second of the three people quoted above said. The clauses are not limited to project loans, but also other forms of debt financing, such as corporate bonds, the person said.

Earlier, NDTV Profit reported that lenders had hit pause on green-field project financing as they awaited clarity from the RBI on project finance rules. The Indian Banks' Association had sought a rethink of the new provisioning norms and some other aspects of the guidelines.

Lenders also wanted differential treatment between government- and private-sector-owned projects. In the case government owned projects, or those implemented by public sector companies, lenders are seeking lower provisions.

The regulator is yet to come back on the representation made by the lenders, the third of the three people quoted above said. The RBI is not expected to clarify its final position on the guidelines any time soon, the person said.

As of May, industrial credit extended by banks stood at over Rs 37 lakh crore, up 9.4% year-on-year. Large industries accounted for Rs 26.5 lakh crore, up 7.1% from a year ago.