Informist, Monday, May 6, 2024

By Richard Fargose

MUMBAI – The Reserve Bank of India's draft guidelines on project financing, which proposes significant enhanced provisioning requirements for lenders, may tighten funding towards this segment and dent infrastructure and capital expenditure growth.

The RBI's draft circular, issued on Friday, proposes tighter guidelines on project financing under which lenders would have to make provisions of up to 5% of the outstanding exposures during construction, as against 0.4% currently, which would reduce to 2.5% once the asset turns operational. As per the proposed norms, lenders are required to make the 5% provision in a phased manner—-2% in 2024-25 (Apr-Mar), 3.5% in 2025-26 and 5% in 2026-27.

Analysts said that as the Indian banks and non-bank lenders have faced large defaults on infrastructure loans in the past, the RBI's proposed guidelines is a pre-emptive step to avoid any repeat of those cases, given the recent spurt in infrastructure spending.

"While this is prudent from a risk management perspective, coming from the regulator's experience in the last credit cycle, we believe this can be detrimental to growth in the capital intensive infrastructure sectors in the economy," JM Financial Institutional Securities said in a report. Brokerage firm Macquarie expects that these rules will only further tighten funding towards project finance exposures.

The draft guidelines also proposed that no individual lender should have an exposure less than 10% of the aggregate exposure in projects financed under consortium arrangements, where the aggregate exposure of lenders to the project is up to 15 bln rupees. Whereas, this individual exposure floor should be 5% or 1.5 bln rupees, whichever is higher, for projects where the aggregate exposure of lenders is more than 15 bln rupees.

"When the government on one hand is trying to promote infrastructure sector funding, it has increased the cost of lending, the cost of operations, because now you will have to provide more capital to lend the same amount of funding," a senior official with a state-owned infrastructure finance company told Informist on the condition of anonymity. "And this is not done progressively. This will put stress on the government to meet (help PSU non-bank lenders') capital adequacy norms," he said.

Shares of state-owned non-banking finance companies such as REC Ltd, Power Finance Corp Ltd and IREDA Ltd ended 4-9% lower today as these lenders are more focussed on financing power infrastructure projects.

Analysts believe significant increase in provisioning requirements will result in lower returns for lenders in project finance and reduce their incremental appetite for such exposure, if implemented in the current form. Market participants and analysts expect that lenders may request the RBI to review a part of the draft norms.

"Risk weight on NBFC (non-bank finance company) funding has been increased, so my bank financing cost already increased by 40-50 basis points. This cost will also be passed on to the borrower. If all the infrastructure projects become unviable, it will create another round of NPAs (non-performing assets) for no reason," a senior official with a state-owned infrastructure finance company said.

Macquarie said as private sector banks also carry contingent and floating provisions of around 100 bps of the overall loan portfolio, they may urge the RBI to consider a part of those provisions towards these additional provision requirements. End

Edited by Aditya Sakorkar

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