RBI Cautions Banks on Promoter Equity Funding Risk in Project Finance

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 banks were required to do at the time

• 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