What changed
RBI clarified that rights, licenses, and authorizations charged as collateral for project financing (including infrastructure) are not tangible security. Banks must now classify these advances as unsecured in Schedule 9 of their balance sheets. Additionally, banks must disclose the total amount of advances secured by such intangible collateral and their estimated value in a separate 'Notes to Accounts' heading.
What it means for you
This change increases transparency by ensuring that loans backed only by intangible assets like project rights are correctly reported as unsecured. For banks, it may increase reported unsecured exposure, potentially impacting capital adequacy calculations and investor perception. Lenders must update their classification and disclosure processes to comply from FY 2009-10.
What you must do
- Reclassify all advances where collateral is only rights, licenses, or authorizations as unsecured in Schedule 9.
- Create a separate disclosure in 'Notes to Accounts' for total advances with intangible security and their estimated value.
- Update internal systems and reporting templates to reflect the new classification from FY 2009-10.
- Train credit and reporting teams on the distinction between tangible and intangible security for project loans.
Who it affects
All Scheduled Commercial Banks (including Local Area Banks), Credit risk and reporting departments, Project and infrastructure finance teams
What types of collateral are now considered intangible under this circular?
Rights, licenses, authorizations, and similar charges taken as collateral for projects (including infrastructure) are now treated as intangible security, not tangible.
How should banks disclose advances backed by intangible collateral?
Banks must show the total amount of such advances and their estimated value under a separate head in 'Notes to Accounts' to differentiate them from fully unsecured loans.
From when is this circular applicable?
The circular is applicable from the financial year 2009-10 onwards.