 "RBI, Reserve Bank of India")
RBI, Reserve Bank of India (Photo: Reuters)
The Reserve Bank of India (RBI) is planning to phase out its implementation of increased provisioning for project financing. This aims to ease the burden on lenders and allow them time to adjust to potential impacts in each phase of financing. According to a report by The Economic Times (ET), the central bank is considering giving projects nearing completion some leniency in provisioning requirements.
The RBI’s move comes in response to concerns raised by both lenders and the Finance Ministry. The central bank faced criticism claiming that the new norms may escalate costs, potentially making some projects unviable. Despite these concerns, the RBI remains committed to increasing provisions to mitigate risks in the project financing sector, which has long been plagued by delays.
“The current thinking is to implement these norms gradually, staggering the provisions, so that lenders’ profit margins are not significantly affected. Project finance lenders will be provided sufficient time to adapt, with careful consideration to ensure ongoing project funding is not disrupted,” a source familiar with the RBI’s discussions was quoted by ET.
The draft guidelines released in May proposed that all regulated entities gradually increase their provisions to 5 per cent during the construction phase of a project. The RBI had outlined a three-year trajectory for this increase: 2 per cent in financial year 2024-25 (FY5), 3.5 per cent in FY26, and 5 per cent by FY27. This represents a significant rise from the current 0.4 per cent standard asset provisions on project loans.
The central bank is now considering either delaying the onset of these provisions by a year or extending the time frame for full implementation. Additionally, projects that are close to becoming operational may be granted waivers on a case-by-case basis, the report added.
The draft norms also stipulate that for projects where the date of commencement of commercial operations (DCCO) is cumulatively deferred by more than two years for infrastructure projects (or one year for non-infrastructure projects), lenders will be required to maintain an additional specific provision of 2.5 per cent over and above the standard asset provision.
Lenders have expressed particular concern over the requirement to apply these provisions retrospectively, affecting loans that were already disbursed. Infrastructure finance companies, including Power Finance Corp and Rural Electrification Corp, which together hold more than Rs 15 trillion in loans, are expected to be the most affected.
The report does warn that the overall increase in provisions could impact profitability and make project financing less attractive. This concern contrasts with the government’s push for infrastructure development.
The potential impact on infrastructure financing is significant, as projects like HAM, which involve the participation of the National Highways Authority of India (NHAI), are considered lower risk than private sector-maintained toll roads. Moreover, discouraging infrastructure lending could have broader implications for the government’s ambitious infrastructure plans, which include more than Rs 11 trillion in investment this financial year. Such discouragement could also hinder the government’s target of achieving 7 per cent economic growth this financial year.
First Published: Aug 27 2024 | 12:06 PM IST
