According to the guidelines, banks are expected to lend directly to the projects and ensure that the funds don't go to state governments. But in a notification posted on the central bank's website on Wednesday, the RBI said, "It has been observed that some banks have extended financial assistance to state PSUs which is not in accordance with the norms." The central bank went on to advise these institutions to "follow the instructions scrupulously, even while making investment in bonds of sick state PSUs as part of the rehabilitation effort." In its guidelines released in July this year, the central bank had allowed banks to sanction term loans only to corporate entities including special purpose vehicles (SPVs) set up exclusively to fund infrastructure projects. It had instructed banks and eligible financial institutions to ensure that these loans/investments are not used to fund state governments budgets.

In the late nineties, many state PSUs had floated bonds guaranteed by their respective state governments which subsequently resulted in fiscal slippages for the states as these entities had not managed the funds properly. RBI has been trying to make infrastructure lending more attractive for banks by liberalising exposure and provisioning norms and also the conditions which would make the loans turn bad. It may be recalled that RBI had said in its guidelines on July 1 that single-borrower limits would be applicable to public sector entities. According to RBI, a bank can lend to a single borrower up to 15% of the bank's capital. This includes the bank's entire capital base -- equity, debt and other hybrid instruments.

However, banks could be more liberal in case of entities bidding in the PSU divestment programme of the government. Banks have been allowed to fund acquisition financing of successful bidders in these auctions. The regulatory ceiling in such cases would be higher, at 40% of the bank's capital, which will be on par with the norms applicable for a group.