Reschedulement of Project Loans

Corporates are passionate about expansions, growth and success. They envisage business plan, execute it, establish it and then look forward at new plans in pursuit of business growth and success. The course requires funding from banks in the form of project and non project loans. The financing plans require preparing the financial projections, project implementation and loan repayment schedules. A common situation faced by many finance teams is of delay in project implementation due to circumstances sometimes in their control and sometimes not in their control. Many a times, the business does not perform as aggressively as projected or the business faces unprecedented situation (example INR-Dollar volatility crisis) resulting in lower cash flows. This situation makes the corporates incapable of making timely repayment of the principal instalments/dues. The situation requires for relooking at financial projections, reworking the same and reschedule the loan repayment in a form acceptable to the bank, and which Corporate can also afford in the changed scenario.

It has been observed that while availing the loan, the borrower generally projects optimistic financial projections and does not factor many important aspects like hedging cost, taxes, duties, discounts, commissions etc. The Sales projections are made aggressively however the Cost of Sales is not prepared with a conservative view (i.e. keeping the cost high). This leads to financial projection picture giving acceptable financial ratios to the lenders. The appraisal teams at lenders understand this phenomena and rework on projections submitted by the borrower, realign with the industry standards and undertake sensitivity analysis.  

The reschedulement of loan generally requires to increase the remaining tenor of the loan with or without additional moratorium. The lenders have to consider this aspect from three points: (1) Capability of the borrower’s projected cash flows to repay as per the revised financial projections (2) Sacrifice of bank based on difference in present value of loan cash flows (Principal and Interest) pre and post reschedulement (3) Regulatory/RBI guidelines

Capability of the borrower’s projected cash flows to repay as per the revised financial projections

This is the most crucial aspect since understanding the capacity of the borrower’s future cash flows that can sustain the revised repayment schedule with a sufficient coverage (ie. Debt Service Coverage Ratio) is important otherwise the borrower may again face the cash flow shortfall in future in repayment of loan. Since, the process of approving a reschedulement being time consuming for large loans, it requires the finance teams to give their best possible sustainable projections so that in future such need for reschedulement does not arise. Any mistake here would cause unwanted restructuring tags in future /upset the banking relationship.    

Sacrifice of bank based on difference in present value of loan cash flows (Principal and Interest) pre and post reschedulement

The extension in remaining loan’s tenor affects the present value of the loan. Therefore, if the rate of interest on the loan is kept at the same level of pre-reschedulement, the present value of the loan will decline, and cause sacrifice to the bank. From regulatory aspects, if such reschedulement falls under restructuring, then banks have to also provide for provisioning (i.e. reducing their business profits) to the extent of sacrifice.    

Regulatory/RBI guidelines

The Reserve Bank of India (RBI) guidelines consider the term loans from Infrastructure project loans and Non infrastructure project loans. These guidelines consider the Date of Commencement of Commercial Operations (DCCO) as critical aspect for success of project loans. The guidelines provide that for infrastructure project loans, the DCCO can be extended upto two years from the original DCCO date as considered at the time of sanction of loan. Such extension in DCCO and consequential shift in repayment period by equal or shorter duration (including the start date and end date of revised repayment schedule) would also not be considered as restructuring provided all other terms and conditions of the loan remain unchanged. For non infrastructure project loans, the DCCO and consequential shift in repayment is permitted to be extended upto one year without classifying the loan as restructured.

The DCCO can be further extended by two years (i.e total four years from original DCCO) for Infra project loan and one year (i.e total two years from original DCCO) for non infra project loans from the original DCCO, classifying the loans as restructured loans. However, any change in the repayment schedule of a project loan caused due to an increase in the project outlay (increase by 25% or more of the original outlay) on account of increase in scope and size of the project, is not treated as restructuring. The classification of loan as restructured has bearing (reducing their profits) on the profitability of the bank due to sacrifice involved and also higher stipulated provisioning norms by RBI for such loans. Therefore, the banks have to really have a heart when the loan has to be acknowledged for restructuring.

It may be observed that if the shift in DCCO is within the permitted two year (for Infra Project Loans) and one year (for Non Infra Project Loans) limits from the original DCCO, the RBI guidelines allows consequential shift in repayment period by equal or shorter duration (including the start date and end date of revised repayment schedule) without classifying the loan as restructuring provided all other terms and conditions of the loan remain unchanged.

The issue faced by corporates is in situation when the DCCO is achieved within the permitted two years or one year limit (with consequential permitted change in repayment schedule) and after that during the renewed life of the loan at a later stage due to other extraneous reasons the borrower needs to again either extend the repayment schedule or to change the loan instalment amount without changing the terminal date of repayment. It is clear that since during the first instance (extension in DCCO and Repayment Schedule by two or one year) the account was not classified as restructured, therefore now at the time second instance for need of change in repayment schedule, will make the account as restructured and attract the higher provisioning norms and other bearings for the banks and borrower.

In light of the above issues, while working out the project plans and implementation schedule, deciding the DCCO has a lot of weight on financing plans. The DCCO has to be decided very cautiously since extension in DCCO is very clearly permitted to be maximum two (without Restructuring tag) to four (with Restructuring tag) years for infra project loans, and one (without Restructuring tag) to two (with Restructuring tag) years for non infra project loans.

 It would be important to note that as per the February 2014 RBI Guidelines, if banks take over/refinance the existing infra and other project loans by way of take-out financing, they can fix a longer repayment schedule provided the loan is ‘Standard’ asset in the books of existing bank, should have not been restructured in the past, substantial take over (i.e. more than 50%) and repayment schedule is fixed taking into account life cycle of the project and cash flows from the project.    

Related Article : Should RBI allow for Restructuring of Advances?