Banks may seek waiver of provisioning for loans to MSMEs

The Reserve Bank of India.
The Reserve Bank of India.


  • The communication from the banks is likely to be spearheaded by the Indian Banks Association.

New Delhi: Banks are planning to write to the Reserve Bank of India (RBI) and the finance ministry to exempt loans given to micro, small and medium enterprises (MSMEs) from proposed rules for provisioning for infrastructure project financing.

The move is aimed at protecting MSMEs, who are minor players in the overall infrastructure business but are nevertheless large in number. With a government thrust to boost infrastructure, more and more small businesses are looking entering the sector.

The RBI's proposed rules are aimed at protecting lenders from risks such as cost-overruns – a frequent outcome of delayed construction projects, for instance.

However, banks say MSMEs are significant borrowers for infrastructure projects, and need cheaper loan,  two people aware of the matter said.

The RBI seeks to overhaul rules governing project-lending to enable unrestricted flow of funds to the infrastructure sector and ensure that lower risks.

The communication from the banks is likely to come from by the Indian Banks Association, a Mumbai-based representative body of Indian banks and financial institutions, the people mentioned above said. Some banks are also expected to give their individual responses on RBI draft regulations.

"There is a proposal among banks to write to the regulator, and finance ministry to make special provisions for small industries and MSMEs in the context of the RBI's proposal to overhaul rules governing project lending for the infrastructure sector," one of the people mentioned above said requesting anonymity.

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For timely completion

"The idea of the draft RBI proposals is that projects are completed in time. We would like to get clarification on whether the changed provisioning will apply to all categories of infrastructure project financing to small industries and MSMEs. The latter should be kept out from proposed changes in provisioning," the person added. 

The head of a prominent public sector bank (PSB), who spoke under the condition of anonymity, said that several points will need to be discussed if the RBI wants changes for all infrastructure project financing, including structures like Infrastructure Investment Trusts (InvITs).

"Clarification would also be required on whether changed provisioning norms are appropriate for all projects or applicable to investments above a certain amount," the person said, suggesting that banks are yet to give their suggestions.

The RBI has sought comments on its proposals by 15 June.

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A senior finance ministry official said that the government is studying the RBI proposals and will respond to the regulator if required.

Spokespersons for the finance ministry, the RBI and the Indian Banks Association didn't respond to emailed queries.

The framework for lenders

On 3 May, the RBI issued a draft prudential framework for lenders undertaking project finance, which proposed increasing the standard asset provisioning to 1-5% of loans from the current 0.4%.

According to the draft prudential framework, when a project is in the construction phase, lenders must set aside a provision of 5% of the loan amount in protect against defaults. This will come down to 2.5% once a project is operational and 1% when there's adequate cashflow to repay obligations.

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The RBI has allowed lenders three years to reach 5% provisioning—2% in FY25, 3.5% in FY26 and 5% by FY27.

The draft rules also say that banks should have a clear visibility on the date on which a project is expected to begin commercial operations and increase provisions in case operations are delayed.

Any delay over three years at the beginning of an infrastructure project should change the classification of the loan from standard to stressed.

In a recent research report, CareEdge Ratings (formerly Care Ratings) said the draft RBI provisions could dampen the bidding appetite among infrastructure developers in the medium term.

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"Projects with cost overrun (due to a change of scope) of less than 25% will face asset classification-related challenges and an increased financial burden on the project sponsor. Shifting the condition of minimum unencumbered land availability from the existing pre-disbursement condition to a pre-sanction stage will lead to an unwarranted delay in achieving financial closure," it added.

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