RBI allows banks to fund project cost overruns

The RBI has said banks may fund additional “interest during construction”, which may arise on account of delay in project completion.

In a major relief to promoters of big projects, the Reserve Bank of India (RBI) has decided to allow banks to fund project cost overruns, which may arise on account of extension of the date of commencement of commercial operations (DCCO), without treating the loans as ‘restructured asset’.

The RBI has said banks may fund additional “interest during construction”, which may arise on account of delay in completion of a project. “Other cost overruns (excluding interest during construction) can be up to a maximum of 10 per cent of the original project cost,” the RBI said in a notification to banks. “The debt equity ratio, as agreed at the time of initial financial closure, should remain unchanged subsequent to funding cost overruns or improve in favour of the lenders and the revised debt service coverage ratio should be acceptable to the lenders.”

It said disbursement of funds for cost overruns should start only after the sponsors or promoters bring in their share of funding of the cost overruns.

As per the RBI norms, revisions of the DCCO and consequential shift in repayment schedule for equal or shorter duration (including the start date and end date of revised repayment schedule) will not be treated as restructuring “provided the revised DCCO falls within the period of two years and one year from the original DCCO stipulated at the time of financial closure for infrastructure projects and non-infrastructure projects respectively.”

Many big projects have been struggling in the last stages of completion due to cost overruns, bankers said.