A Delayed COD, a ₹150 crore Equity Offer and the Cost of Classification
A bank holds a single ₹900 crore term loan to a road SPV sanctioned in 2022, with COD scheduled for March 2025. Land for a 6 km viaduct has still not been handed over by the state agency, and the SPV now expects COD in September 2026. Interest was paid until last quarter out of the sponsor's initial infusion, but that money is exhausted. The project's base-case DSCR on the original debt profile is 1.05, and EBITDA is zero until tolling begins. The sponsor offers ₹150 crore of fresh equity, of which ₹55 crore would service interest during the extension, and proposes a 24-month re-profiling of principal. The bank's risk-weighted assets are ₹60,000 crore and its CET1 ratio is 11.60% against an internal floor of 10.50%. The account is presently standard. Policy requires provisioning of 0.40% for standard infrastructure exposure, 15% for substandard, and 5% additional for restructured accounts; risk weight is 100% standard and 150% substandard. Whether a DCCO extension may be granted without downgrade depends on the applicable regulatory window and the bank's board-approved policy, which the credit team must verify.
1. Compute the CET1 impact of the three plausible treatments and use the numbers to frame the decision.
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CET1 capital = 11.60% × ₹60,000 crore = ₹6,960 crore. Headroom above the 10.50% internal floor = 1.10% of RWA = ₹660 crore.
Option A - extend DCCO, retain standard. Provision = 0.40% × 900 = ₹3.6 crore. CET1 = 6,956.4; RWA unchanged at 60,000; ratio = 11.594%. Impact ≈ 1 basis point. This is only available if the extension falls inside the permitted regulatory window and the bank can demonstrate viability - it is a legal conclusion, not an accounting choice.
Option B - classify substandard. Provision = 15% × 900 = ₹135 crore. Risk weight 150%, so RWA = 60,000 + 450 = 60,450. CET1 = 6,825; ratio = 11.290%. Impact ≈ 31 basis points, consuming ₹135 crore, or about one-fifth of the entire capital headroom above the internal floor.
Option C - restructure with DCCO extension. Provision = 3.6 + 45.0 = ₹48.6 crore. CET1 = 6,911.4; RWA 60,000; ratio = 11.519%. Impact ≈ 8 basis points.
Framing. The gap between Option B and Option C is ₹86.4 crore of provisions and about 23 basis points of CET1 - meaningful for a bank with ₹660 crore of headroom. But the choice cannot be made on provisioning alone: Option C is only legitimate if the project is genuinely viable after re-profiling, and Option A is only legitimate if the regulatory and policy conditions are met. Cheap classification is not the same as correct classification.
2. Recommend a structure and list the conditions you would attach, explaining what each condition is protecting against.
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Recommendation: Option C - a conditional restructuring with a DCCO extension to September 2026, not an immediate downgrade and not an unconditional standstill.
The facts support it: the delay is caused by a state agency's failure to hand over land, not by sponsor incapacity; the sponsor is putting in real money (₹150 crore) rather than asking the bank to absorb the shortfall; and the project is viable at 1.05 DSCR, albeit thinly.
Conditions and what each protects against:
- ₹150 crore equity to be infused first, before any re-profiling takes effect - protects against a restructuring that leaves the sponsor with an option and the bank with the risk.
- ₹55 crore of interest funded by equity, not by capitalised debt - protects the DSCR from being silently eroded (see next task).
- A 12-month DSRA funded at COD - protects against the 1.05 DSCR, which has no capacity to absorb a single bad quarter.
- Promoter personal guarantee and pledge of additional equity - protects against abandonment if the state agency delays again.
- Escrow of toll receipts with a cash sweep above 1.20 DSCR, and a dividend lock-up - protects against cash leakage once tolling starts.
- Tripartite agreement with the state agency on the land handover date, with milestone reporting - protects against the same failure recurring without consequence.
- Quarterly independent engineer review and a re-test of DSCR at COD - protects against a restructuring that is never re-examined.
Downgrading now would crystallise ₹135 crore of provisions on a project that the borrower is still trying to complete. Forbearance without conditions would do the opposite - keep the account standard while the risk quietly grows. The structure must sit between the two.
3. The SPV proposes to capitalise the ₹55 crore of interest during the extension into the loan. Explain the accounting treatment and quantify the effect on DSCR.
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Accounting treatment. Borrowing costs are capitalised only while the asset is a qualifying asset and the capitalisation conditions are met - broadly, expenditure has been incurred, borrowing costs are being incurred, and activities necessary to prepare the asset are in progress. If construction has genuinely stalled for want of land, the capitalisation criterion is arguable and the bank must take a view; if the project is still active (other packages progressing, viaduct deferred), capitalisation may be defensible. From the bank's side, the more important question is income recognition: interest that is not being serviced in cash should not be taken to P&L as if it were. The bank should recognise it on a cash basis or place it in a suspense/accrued-but-not-due category, and reverse any interest already accrued but uncollected. Otherwise the P&L reports income that the borrower has not paid and may never pay.
DSCR effect. Capitalising ₹55 crore takes debt from ₹900 crore to ₹955 crore. At 9% over roughly 15 remaining years, the annuity factor is about 0.1241, so debt service rises from about ₹111.7 crore to ₹118.5 crore - an increase of about ₹6.8 crore a year. The project's EBITDA at COD is expected to cover about 1.05 × ₹111.7 = ₹117.3 crore. On the capitalised profile, DSCR falls to 117.3 / 118.5 = 0.99 - below 1.00, i.e. the project can no longer service its debt from operations.
Conclusion. Capitalising the interest converts a liquidity problem into a solvency problem on paper. Fund the ₹55 crore from equity, or from a subordinated unsecured loan with a standstill, and keep the senior DSCR at or above 1.05 until tolling data is available.