Mint Primer | Infra financing guidelines: Why are banks upset?

What is the idea behind RBI’s circular?

Banks faced a non-performing asset (NPA) crisis between 2009 and 2012 due to excessive lending to infrastructure firms, prompting the Reserve Bank of India to frame guidelines on resolving stressed assets. Its first circular in 2019 laid down the framework for banks. But it did not cover resolution of loans given to projects under implementation due to change in the ‘date of commencement of commercial operations’, or DCCO. The new draft guidelines released on Friday provide a framework for financing of projects in infra, non-infra, and commercial real estate sectors by banks, non-banks and cooperative banks.

What are the main proposals?

First, RBI has proposed an increase in standard asset provisioning to 1-5% of loans from the current 0.4% in a phased manner. Second, individual lenders who are part of a consortium, should take at least 10% exposure in infrastructure projects worth ₹1,500 crore, and 5% or ₹150 crore, whichever is higher, in projects worth more. Third, banks can call moratorium on repayment of only six months from the start of commercial operations. Fourth, reduction in net present value during construction, due to factors like change in projected cash flows, may lead to credit impairment.

What are the positives from the new circular?

Experts say the new rules will push banks to do project preparation in a more scientific way and give realistic targets for DCCO. RBI has made it clear that lenders must ensure that financial closure is achieved for all projects financed by them and that the DCCO is clearly spelt out and documented prior to disbursement of funds.

What will be the impact on banks?

Banks have to keep provisioning of 5% of the loan amount when a project is in construction phase, which will subsequently reduce as the project progresses. Banks are expecting an increase in lending rates to infrastructure projects as they have to pass on the cost of setting aside higher provisioning. Assuming a bank has a ₹10-trillion loan book, 15% of which is into infrastructure lending, if it has to set aside an average of 3% for provisioning, this will translate into a hit of ₹4,500 crore on profitability over three years.

What are the bankers saying?

These rules could discourage banks from project financing, which could jeopardize private investment when private capex cycle is just picking up. As per RBI estimates, India’s per capita investment in infrastructure, at $90.6 in constant 2015 dollar terms in 2020, needs to be scaled up by increasing infrastructure investment growth from around 3.5% to at least 6%. Bankers also question the sanctity of the 5% provisioning rule, besides saying that a flat six-month moratorium on all projects is onerous.