Date:07/11/2007 URL: http://www.thehindubusinessline.com/2007/11/07/stories/2007110752301000.htm

Back RBI directive to banks on project finance

‘Ensure stipulated debt-equity ratio is maintained’

Our Bureau

Mumbai, Nov 6 The Reserve Bank of India has advised banks to ensure that promoters of projects bring in their equity capital before the debt is advanced. RBI has also asked banks also to ensure that the stipulated debt equity ratio is maintained throughout the life of the debt.

In a circular to banks, the central bank said normally, the promoters either bring their entire contribution upfront before the bank starts disbursing its commitment, or they bring certain percentage of their equity (40–50 per cent) upfront while the balance is brought in stages.

In some cases, promoters agree to bring in equity funds proportionately as the banks finance the debt portion, which according to RBI has greater equity-funding risk.

“To contain this risk, banks are advised in their own interest to have a clear policy regarding the Debt Equity Ratio (DER) and to ensure that the infusion of equity/fund by promoters should be such that the stipulated level of DER is maintained at all times. Further they may adopt funding sequences so that possibility of equity funding by banks is obviated,” the notification said.