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Banks must maintain status quo on project finance provisioning standards – Banking and Financial News
The Indian Banks Association (IBA) will request the Reserve Bank of India (RBI) to maintain the status quo of provisioning required under the new project finance guidelines and keep it unchanged at 0.4%. At a meeting held on Tuesday, bankers stressed that increased provisioning would dissuade creditors from granting 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 too high and, if implemented in its current form, will result in lower returns for lenders in project financing,” a banker told FE, adding: “It will increase credit costs for banks and make project financing unattractive.”
The IBA meeting was held to discuss the implications of RBIproposals for guidelines on project financing. The apex bank has set June 15 as the deadline for stakeholders to submit comments on the draft project financing rules.
Furthermore, bankers said the changes, if any, should only apply to new loans and not retrospectively. Currently, banks have a cumulative exposure of Rs 14.6 billion to the infrastructure and construction sectors. These numbers have grown by 30% in the last five years.
However, apart from the provisioning norms, bankers also consider that some of the other clauses, such as the provision of land requirement of a minimum of 50% in infra-public-private partnerships (PPP) for financial closure, could be a off-side.
The biggest fear is that although the framework is silent on the land requirement for non-PPP and non-infrastructure projects, the indirect meaning could be that there could be an initial 100% land requirement to extend the financing.
Bankers believe that it should be left to creditors to make decisions on a case-by-case basis, taking into account the visibility of the remaining land and the specific requirements of the project. As such, in most cases, lenders look to acquire land closer to 100%, however, depending on the specifics of each case, lenders decide the suitability of the land before granting financing.
According to draft guidelines released last month, a bank must reserve 5% exposure during the construction phase, which decreases as the project becomes operational. When the project reaches the “operational phase”, provisions can be reduced to 2.5% of the financed balance and then 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 finances Industry The Development Council (FIDC), the representative body of non-bank lenders, on Tuesday submitted its feedback to the RBI, requesting the banking regulator to continue with the standard provision of 0.4% for all projects under construction.
“When NPAs (non-performing assets) show a declining trend, then there is no need to significantly increase provisioning for project financing,” said a banker. “The RBI may be worried about the rise in bad loans in infrastructure financing in the future, but banks have done very well in the past to control NPAs,” the banker added.
According to RBI data, banks’ gross NPA fell from a high of 11.2% in March 2018 to a decade-long low of 3.2% in September 2023.