MUMBAI: In a significant relief to the banking sector, the Reserve Bank of India (RBI) has reduced the provisioning requirement for project finance in construction phase to 1% from the earlier proposal of 5%.
In its final guidelines issued on Thursday, the banking regulator has increased the provisioning requirement by 25 basis points in the construction phase of the commercial real estate.
That is, a lender will have to maintain a general provision of 1.25% (1% earlier) at the construction phase of a commercial real estate project and 1% (0.75% earlier) at the operational phase – after commencement of repayment of interest and principal. In the case of commercial real estate– residential housing projects, the provisioning requirement would be 1% construction and for operational phase – 0.75%.
For all others, provision of 1% has to be maintained during construction phase and 0.40% for operational phase. The guidelines will be in effect from October 1.
“In under-construction projects where the aggregate exposure of the lenders is up to Rs 1,500 crore, no individual lender shall have an exposure which is less than 10% of the aggregate exposure,” the RBI said.
For projects where aggregate exposure of all lenders is more than Rs 1,500 crore, the exposure floor for an individual lender shall be 5% or Rs 150 crore, whichever is higher.
Bankers expressed their relief with the quantum of increase in the provisioning. “It is a relief that the uncertainty is over. While there may be a marginal increase in provisioning and cost of credit, these are manageable,” said a senior banker on condition of anonymity.
“Limited impact is expected on NBFCs, as sufficient provisions are provided, as per the expected credit loss assessment and provisioning at present is closer the requirement as per the guidelines. Also, the provisions are applicable prospectively, from Oct 2025 and, thus overall impact for lenders shall be limited,” A M Karthik, Senior Vice President & Co-Group Head Financial Sector Ratings, ICRA said.
The RBI took feedback from 70 stakeholders, including banks, non-banking financial companies, industry associates, central government among others.
In the draft guidelines, which were released last year, the RBI had proposed banks to set aside a provision of 5% of the loan amount when the project is in the construction phase, reduced to 2.5% once it becomes operational and then down to 1% after the project starts generating cash sufficient to cover lenders’ repayment.
After the draft guidelines, bankers and non-banking financial companies who fund infrastructure, expressed their discomfort as a significant amount of money would have been locked up. The finance ministry had also expressed their worries about the proposal.
Under the final guidelines, lenders must maintain additional specific provisions of 0.375% for infrastructure project loans and 0.5625% for non-infrastructure project loans, for each quarter of deferment, over and above the applicable standard asset provision. These can be reversed upon the commencement of the commercial operation.
In addition, lenders will have to monitor the performance of the projects. If any buildup of stress is noticed then they will have to initiate a resolution plan in advance. It also said that any such credit event must be reported to the central repository of information on large credit by the lender.
Lender will have to undertake a prima facie review of the debtor account within 30 days from the date of such credit event. Project finance account downgraded to non-performing asset for non-compliance, can be upgraded only after the account performs satisfactorily post actual DCCO (date of commencement of commercial operations).
“A project finance account downgraded to NPA for non-compliance, can be upgraded on successful implementation of resolution plan, provided no further request for DCCO deferment is received,” the release said.
The new norms will not apply to projects where financial closure has been achieved as on the effective date, the norms said. Such projects will continue to be guided by existing guidelines.
Banks’ loan to the construction sector has risen by 21.5% in the past five years while the loans to infrastructure sector have grown by 21%. Loans to the construction sector have grown from Rs 1.23 lakh crore in April 2020 to Rs 1.5 lakh crore as of April this year. Loans to infrastructure sector have grown from Rs 10.8 lakh crore in April 2020 to Rs 13.2 lakh crore as of April this year.
Source: The Financial Express
