What changed
RBI observed banks not strictly following existing instructions on commercial viability, revenue stream assessment, and end-use monitoring for infrastructure/housing projects of government-owned entities. It also noted violations of rules requiring term loans only to corporate bodies, due diligence on project viability, and debt servicing from project revenue, not budgetary resources.
What it means for you
Banks must tighten appraisal and monitoring of loans to government-owned entities, ensuring projects generate sufficient revenue for debt repayment. This reduces reliance on government budgets and strengthens credit discipline. Non-compliance could lead to regulatory action, so lenders need to review and report to their boards within three months.
What you must do
- Conduct a comprehensive review of all loans to government-owned entities for compliance with RBI instructions on viability, revenue streams, and end-use monitoring.
- Place a detailed compliance status report before the board within three months from June 14, 2022.
- Ensure term loans are sanctioned only to corporate bodies and that debt servicing is from project revenue, not budgetary resources.
- Strengthen due diligence processes to assess commercial viability and bankability of projects before sanctioning.
Who it affects
All scheduled commercial banks (excluding RRBs), Banks financing infrastructure or housing projects of government-owned entities, Credit appraisal and monitoring teams
What specific instructions are being reiterated?
RBI reiterates that term loans to government-owned entities must be only for corporate bodies, projects must be commercially viable with revenue streams sufficient for debt servicing, and repayment should not come from budgetary resources. These are from Master Circulars on Loans and Advances and Housing Finance.
What is the deadline for the board review?
Banks must carry out a review and place a comprehensive compliance report before their boards within three months from the date of the circular, i.e., by September 14, 2022.
What happens if banks do not comply?
RBI has flagged non-compliance and expects strict adherence. Failure to comply may lead to regulatory action, though the circular does not specify penalties. Banks should treat this as a warning to tighten processes.