RBI Releases Draft Guidelines on ‘Prudential Framework for Income Recognition, Asset Classification and Provisioning’

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  • Last Updated on 6 May, 2024

Prudential Framework for Income Recognition

Press Release No. 2024-2025/244; Dated: 03.05.2024

RBI has released draft guidelines on ‘Prudential Framework for Income Recognition, Asset Classification and provisioning pertaining to Advances – Projects under Implementation’. These guidelines shall apply to Scheduled Commercial Banks (SCBs), Non-Banking Finance Companies (NBFCs), Primary (Urban) Cooperative Banks and All India Financial Institutions (AIFIs).

RBI emphasized that for any project, all mandatory prerequisites must be in place before financial closure. An indicative list of such pre-requisites includes availability of encumbrance-free land and/or right of way, environmental clearance, legal clearance etc., as applicable for the project.

RBI highlighted that in projects financed under consortium arrangements, where the aggregate exposure of the participant lenders to the project is up to Rs 1,500 crores, no individual lender shall have an exposure which is less than 10% of the aggregate exposure. For projects where the aggregate exposure of lenders is more than Rs 1,500 crores, this individual exposure floor shall be 5% or Rs 150 crores, whichever is higher.

Further, lenders wishing to engage in project financing must have a board-approved policy for the resolution of stress in projects on the occurrence of a credit event. The lenders are expected to continuously monitor the build-up of stress in the project and initiate a resolution plan well in advance.

Also, a positive net present value (NPV) is a prerequisite for any Project financed by lenders. Any subsequent diminution in NPV during the construction phase, either due to changes in projected cash flows, project life-period or any other relevant factor which may lead to credit impairment must be construed as a credit event. Accordingly, lenders must get the project NPV independently re-evaluated every year.

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