Alpha Finance Ltd.

Alpha Finance Ltd., an NBFC covered by the applicable RBI prudential capital-adequacy framework, sanctions a loan for a project which management claims qualifies as a “high-quality infrastructure project”.

The following facts are available:

The project has completed more than one year of commercial operations without material covenant breaches and continues to be classified as standard in the lender’s books.
The borrower has repaid 1.5% of the sanctioned project debt.
The borrower has now repaid 2.5% of the sanctioned project debt.
If the borrower subsequently repays 5.5% of the sanctioned project debt, management proposes to apply the lower risk weight applicable at the higher repayment threshold.
The project has an escrow/trust and retention account mechanism for ring-fencing cash flows, pari-passu charge in favour of the lender over movable and immovable assets, and appropriate protection against early termination.

The CFO states:

“Once the project has completed one year of operations and is standard, the concessional risk weight is available irrespective of the percentage of sanctioned debt repaid.”

Which ONE of the following is correct under the amended framework?

A. The CFO is correct because one year of satisfactory commercial operations and standard classification are sufficient to obtain the concessional risk weight.

B. The CFO is incorrect because repayment of at least 2% can trigger the 75% risk weight, while repayment of at least 5% can trigger the 50% risk weight, subject to the other prescribed conditions.

C. The CFO is incorrect because the first concessional risk weight applies only after repayment of 5%, whereas the lower risk weight becomes available only after repayment of 10%.

D. The CFO is correct only where the project has completed one year of operations and the borrower has repaid at least 1% of the sanctioned debt before the reporting date.