The Reserve Bank of India (RBI) today said in a circular to banks that the debts of infrastructure projects developed through PPP mode and having model concession agreements (MCA) will now be treated as secured lending.

However, the circular also said that to be qualified as a secured lending, the borrower will have to adhere to certain norms. A few of these rules are the following:

• The user charges will have to deposited in an escrow account, where senior lenders have priority over withdrawals.
• There should be sufficient risk mitigation measures like pre-determined increase in user charges or increase in concession period, in case project revenues are lower than anticipated.
• The lenders should have a right to trigger termination in case of default in debt service.

These measures will encourage banks to finance infrastructure projects. Project financing together with delays in permits and land acquisition are one of the most critical problems in the private infrastructure industry in India.

Although the measures may push banks to finance projects, infrastructure developers will be certainly not very happy about these new rules that will limit profitability.