Page 54 - Banking Finance July 2024

FEATURES

Why the emphasis on the date of commencement of stipulation in place, project costs can be initially inflated to
commercial operations (DCCO) and its extension (and the secure a higher standby facility.)
preservation of Net Present Value too), now defined as
Credit Events in the draft? Lenders and borrowers should Lenders should generally not allow any moratorium beyond
have flexibility with the DCCO and allow NPV fluctuations, the DCCO. (Loophole: Borrowers might set a DCCO that
while the regulator should focus solely on the 90-day default exceeds expectations to get a longer moratorium.)
norm for clarity.
Other complexities in the proposed guidelines include a
If necessary, a simple logic could have been proposed for special dispensation for PPP projects (requiring only 50 per
DCCO extensions, specifying perhaps just two time periods cent land availability for financial closure). Without a clear
for infrastructure and non-infrastructure projects. The definition of PPP projects (does 5 per cent public sector
direction now divides the DCCO deferment into three participation suffice?), this could cause friction during
categories — endogenous, exogenous, and legal— with supervisory reviews. Also, why have endogenous factors
additional caveats. Questions arise, like why litigation is been given more regulatory forbearance than exogenous
treated separately when exogenous risks already cover law, factors for DCCO extension? Logically, projects should get
regulation, and policy. more forbearance for delay caused by factors outside the
control of promoters. Perhaps, RBI has a rationale.
In a return to a rules-based regulatory approach, the draft
meticulously specifies the norms lenders should follow in Ambiguous or complex guidelines often lead to
their credit administration for project loans. Any rule will interpretation issues during supervisory reviews. A round-
contain potential loopholes. table discussion on the draft — with industry, lenders, and
other stakeholders — where the regulator explains the
For instance, consider the following stipulations:
rationale for each clause, including the provision norm,
For cost overruns, asset classification benefits are available could result in a workable, clear-cut, simple, and
only if the cost increase is 25 per cent or more. (Loophole: unambiguous final version. Both lenders and borrowers
Even if additional costs are actually lower, there is an deserve better.
incentive to pad up costs.)
If a project doesn't generate cash flows but promoters inject
A standby credit facility can be sanctioned up to 10 per cent funds to service the debt, it should not be a problem.
of project cost. (Loophole: Without a minimum margin (BusinessLine)

RBI cancels licence of Purvanchal Co-op Bank, Ghazipur

The Reserve Bank has cancelled the licence of Purvanchal Co-operative Bank, Ghazipur, Uttar Pradesh as it does not
have adequate capital and earning prospects. The Commissioner for Cooperation and Registrar of Cooperative Soci-
eties, Uttar Pradesh has also been asked to issue an order for winding up the bank and appoint a liquidator, the RBI
said in a statement.
On liquidation, every depositor would be entitled to receive deposit insurance claim amount of his/her deposits up to
Rs 5 lakh only from Deposit Insurance and Credit Guarantee Corporation (DICGC). As per the data submitted by the
Purvanchal Co-operative Bank, about 99.51 per cent of the depositors are entitled to receive full amount of their
deposits from DICGC, the RBI said. Giving details, the RBI said the cooperative bank with its present financial posi-
tion would be unable to pay its present depositors in full.

"The bank does not have adequate capital and earning prospects," it said, and added public interest would be ad-
versely affected if the bank is allowed to carry on its banking business any further. Consequent to the cancellation of
its licence, Purvanchal Co-operative Bank has been prohibited from conducting the business of 'banking' which in-
cludes, among other things, acceptance of deposits and repayment of deposits. RBI also informed that DICGC (as on
May 30, 2024) has already paid Rs 12.63 crore of the total insured deposits based on the willingness received from
the depositors concerned of the bank.

BANKING FINANCE | JULY | 2024 | 49