The new RBI draft guidelines for project loans

Source: The post the The new RBI draft guidelines for project loans has been created, based on the article “Infra financing guidelines: Why are banks upset?” published in “Live mints” on 8th May 2024.

UPSC Syllabus Topic: GS Paper 3- Economy-mobilisation of resources

News: The new RBI draft guidelines are designed to enforce credit discipline in project loans. They aim to ensure only serious participants receive financing while addressing issues that led to past non-performing asset (NPA) crises. The new RBI draft guidelines for project loans

What provisions do the new RBI draft guidelines include?

Higher Provisioning: Provisioning for standard assets will increase to 1-5%, up from the current 0.4%.

Minimum Exposure in Consortium Loans: Lenders in a consortium must take at least a 10% exposure in infrastructure projects valued at ₹1,500 crore. For larger projects, a 5% exposure or ₹150 crore is required, whichever is higher.

Moratorium Period: A moratorium period on loan repayment is limited to six months after commercial operations start.

Credit Impairment: Reduction in net present value during construction, due to factors like change in projected cash flows, may lead to credit impairment.

How will the new RBI draft guidelines affect the banks?

Increased Provisioning Costs: Banks must set aside up to 5% of the loan amount during construction, compared to the current 0.4%. For a ₹10-trillion loan book with 15% infrastructure exposure, this translates to a profit hit of ₹4,500 crore over three years.

Higher Lending Rates: To cover increased provisioning costs, banks will likely increase lending rates on infrastructure projects.

Stricter Moratorium Limits: A six-month moratorium after project commencement could limit repayment flexibility, making financing less attractive.

What are bankers’ concerns?

Investment Risks: Bankers believe the stricter rules could discourage project financing, risking private investment at a time when capital expenditure is increasing.

Questionable 5% Provisioning Rule: Bankers challenge the 5% provisioning requirement during construction, considering it overly restrictive and questioning its impact on loan profitability.

Question for practice:

Discuss the potential impact of the new RBI draft guidelines on banks’ profitability and lending practices in infrastructure projects.