Discount Rate for Computing Present Value of Future Cash Flows

Please refer to para­graph 4.5 of cir­cu­lar DBOD.BP.BC.No.99/21.04.132/2012–13 dat­ed May 30, 2013, in terms of which a rate equal to the bank’s Bench­mark Prime Lend­ing Rate or base rate (whichev­er is applic­a­ble to the bor­row­er) as on the date of restruc­tur­ing plus the appro­pri­ate term pre­mi­um and cred­it risk pre­mi­um for the bor­row­er cat­e­go­ry on the date of restruc­tur­ing will be used to dis­count future cash flows for the pur­pose of deter­min­ing the diminu­tion in fair val­ue of loans on restructuring.

2. On a review, it has been decid­ed that a rate equal to the actu­al inter­est rate charged to the bor­row­er before restruc­tur­ing may be used to dis­count the future cash flows for the pur­pose of deter­min­ing the diminu­tion in fair val­ue of loans on restruc­tur­ing. In cas­es where the exist­ing cred­it facil­i­ties to a bor­row­er car­ry dif­fer­ent rates of inter­est, the weight­ed aver­age inter­est rate (with share of each cred­it facil­i­ty in the total out­stand­ing of the bor­row­er as on the date of restruc­tur­ing being used as weights) may be used as the dis­count­ing rate. This dis­count rate may be used to dis­count both the pre-restruc­tur­ing cash flows as well as post-restruc­tur­ing cash flows.

3. The above method­ol­o­gy may be con­sis­tent­ly used wher­ev­er banks are required to com­pute fair/present val­ue of loans under the guide­lines issued by the Reserve Bank of India, includ­ing for the pur­pose of com­put­ing net present val­ue of project loans as required in terms of cir­cu­lar DBR.No.BP.BC.53/21.04.132/2014–15 dat­ed Decem­ber 15, 2014. It is clar­i­fied that this instruc­tion will be applic­a­ble to all projects where changes in amor­ti­sa­tion sched­ule have been car­ried out under the above circular.

RBI/2015–16/111
DBR.No.BP.BC.27/21.04.048/2015–16

July 2, 2015