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Sanction of loans to State PSUs against guarantee of State Governments – January 8, 2004

 
Sanction of loans to State PSUs against guarantee of State Governments – January 8, 2004

NHB (ND)/DRS/POL/ 99 /2004

January 8, 2004

To

All Housing Finance Companies

Dear Sir,

Sanction of loans to State PSUs against guarantee of State Governments

It has been observed that certain housing finance companies (HFCs) have been sanctioning loans to various State Government undertakings purely based on the strength of the guarantees made available by the concerned State Government. The Reserve Bank of India (RBI) has since advised banks and financial institutions coming under its regulatory purview not to sanction loan solely on the basis of guarantees extended by State Governments.

2. After examining all aspects and in the light of the above regulatory policy adopted by RBI, it has been decided that similar stance be adopted in respect of sanctioning of loans by HFCs to state government undertakings and the Special Purpose Vehicles (SPVs) set up by them against the availability of State Government guarantee.

3. Accordingly, all HFCs are advised that they should not sanction loans to state government undertakings/SPV for any project solely on the basis of guarantees extended by State Governments. HFCs are further advised they may sanction loan to projects subject to the following conditions:

  • HFCs should have the requisite expertise for appraising technical feasibility, financial viability and bankability of projects, with particular reference to the risk analysis and sensitivity analysis.
  • The amount sanctioned should be within the overall ceiling of the prudential exposure norms prescribed by NHB.
  • In respect of projects undertaken by public sector units, term loans may be sanctioned only for corporate entities (i.e. public sector undertakings registered under Companies Act or a Corporation established under the relevant statute). Further, such term loans should not be in lieu of or to substitute budgetary resources envisaged for the project. The term loan could supplement the budgetary resources if such supplementing was contemplated in the project design. While such public sector units may include SPVs registered under the Companies Act set up for financing infrastructure projects, it should be ensured that these loans/investments are not used for financing the budget of the State Governments. Whether such financing is done by way of extending loans or investing in bonds, HFCs should undertake due diligence on the viability and bankability of such projects to ensure that revenue stream from the project is sufficient to take care of the debt servicing obligations. Further, in the case of financing SPVs, HFCs should ensure that the funding proposals are for specific monitorable projects.
  • HFCs may also lend to SPVs in the private sector, registered under Companies Act for directly undertaking infrastructure projects which are financially viable and not for acting as mere financial intermediaries. HFCs may ensure that the bankruptcy or financial difficulties of the parent/ sponsor should not affect the financial health of the SPV.

4.

  • In respect of housing/infrastructure projects undertaken by Government owned entities, HFCs should undertake due diligence on the viability of the projects. HFCs should ensure that the individual components of financing and returns on the project are well defined and assessed. State Government guarantees may not be taken as a substitute for satisfactory credit appraisal and such appraisal requirements should not be diluted on the basis of any reported arrangement with the Reserve Bank of India or any bank for regular standing instructions/periodic payment instructions for servicing the loans/bonds.
  • Infrastructure projects are often financed through Special Purpose Vehicles. Financing of these projects would, therefore, call for special appraisal skills on the part of lending agencies. Identification of various project risks, evaluation of risk mitigation through appraisal of project contracts and evaluation of creditworthiness of the contracting entities and their abilities to fulfill contractual obligations will be an integral part of the appraisal exercise. In this connection, HFCs may consider constituting appropriate screening committees/special cells for appraisal of credit proposals and monitoring the progress/ performance of the projects. Often, the size of the funding requirement would necessitate joint financing by more than one lender under consortium or syndication arrangements. In such cases, participating HFCs may, for the purpose of their own assessment, refer to the appraisal report prepared by the lead institution or have the project appraised jointly.

5. Housing finance companies are advised to comply with the above requirements while sanctioning loans to government undertakings/SPVs against government guarantees.

6. Please acknowledge receipt.

Yours faithfully,

Sd/-

(V. Raghu)
Deputy General Manager