MUMBAI: The Indian Banks’ Association (IBA) will request the Reserve Bank of India (RBI) to maintain status quo on the provisioning required under the new project finance guidelines, and keep it unchanged at 0.4%. In a meeting held on Tuesday, bankers have stressed that raising provisioning would deter lenders from extending loans at a time when the government has set significantly high targets for investment in the infrastructure sector.
“Banks believe that the 5% provisioning requirement under the proposed guidelines is very high, and if implemented in the current form, will result in lower returns for lenders in project finance,” a banker told FE, adding: “It will increase the incremental credit costs for banks and will make project financing unattractive.”
The IBA meeting was held to discuss the implications of the RBI’s proposed guidelines on project finance. The apex bank has set June 15 as the deadline for stakeholders to submit feedback on the draft project financing rules.
In addition, bankers said the changes, if any, should apply only to new loans, and not retrospectively. Currently, banks have cumulative exposure of Rs 14.6 trillion to the infrastructure and construction sectors. These numbers have grown by 30% in the past five years.
However, besides the provisioning norms, bankers also feel that some of the other clauses, such as the provision for land requirement of minimum 50% in infra public private partnerships (PPP) for financial closure, could be a deterrent.
The bigger fear is that though the framework is silent on land requirement for infra non-PPP and non-infra projects, the indirect meaning could be that there could be a 100% upfront land requirement for extending funding.
Bankers believe that it should be left to the discretion of lenders to take decisions on a case-to-case basis, considering the visibility on remaining land and project-specific requirements. As such, in most of the cases lenders look for land acquisition closer to 100%, however depending on the specifics of each case, lenders decide adequacy of land before extending funding.
As per the draft guidelines issued last month, a bank has to set aside 5% of the exposure during the construction phase, which goes down as the project becomes operational. Once the project reaches the ‘operational phase’, the provisions can be reduced to 2.5% of the funded outstanding and then further to 1% if certain conditions are met. The guidelines are applicable to all commercial banks, including small finance banks and non-banking financial companies (NBFCs).
The Finance Industry Development Council (FIDC), the representative body for non-bank lenders, on Tuesday submitted its feedback to the RBI, requesting that the banking regulator continue with the standard provision of 0.4% for all projects in the construction phase.
“When NPAs (non-performing assets) are showing a falling trend, then there is no need to significantly increase provisioning for project financing,” said a banker. “RBI may be concerned about increase in bad loans in infra financing in future, but banks have done very well in the past to control NPAs”, the banker added.
According to RBI data, gross NPA of banks has fallen from a high of 11.2% in March 2018 to a decadal low of 3.2% in September 2023.
Source: The Financial Express