What changed
RBI observed that the practice where promoters agree upfront to bring equity proportionately as banks disburse debt poses greater equity-funding risk. The circular advises banks to adopt a clear policy on Debt-Equity Ratio and ensure promoters' equity infusion maintains the stipulated DER at all times, and to structure funding sequences to prevent banks from effectively funding equity.
What it means for you
Banks must tighten project finance underwriting to avoid indirectly bearing promoter equity risk. Lenders need to enforce stricter equity infusion schedules and monitor DER continuously. This reduces the risk of project defaults due to insufficient promoter skin in the game.
What you must do
- Review and update your board-approved policy on Debt-Equity Ratio for project finance.
- Ensure loan agreements mandate promoters to maintain stipulated DER at all times during disbursement.
- Design funding sequences so that bank disbursements are contingent on prior or concurrent equity infusion by promoters.
- Monitor equity funding risk in existing project loans and renegotiate terms if needed.
Who it affects
All commercial banks (excluding RRBs) engaged in project finance, Credit risk and project finance teams, Loan syndication and monitoring departments
What is the main risk RBI is highlighting in this circular?
RBI flags that when promoters agree to bring equity proportionately as banks disburse debt, there is greater equity-funding risk—meaning the bank may end up funding the promoter's equity share if the promoter fails to bring in funds on time.
What should banks do to comply with this advisory?
Banks must have a clear board-approved policy on Debt-Equity Ratio, ensure promoters infuse equity to maintain stipulated DER at all times, and structure funding sequences to avoid banks indirectly funding equity.
Does this circular apply to Regional Rural Banks?
No, the circular explicitly excludes RRBs. It applies to all other commercial banks.