State-owned lenders plan to approach the government seeking changes to terms governing performance bank guarantees (PBGs), timely compensation from concessioning authorities, and greater immunity for board members sanctioning funds for infrastructure projects as they firm up their response to Reserve Bank of India (RBI) draft rules on project financing that call for higher provisioning.
“If banks have to continue their support to the infrastructure sector, then these issues need to be resolved,” said a public sector bank (PSB) senior executive.
PSBs had discussed the issue at a meeting last week and decided to approach the finance ministry to point out their concerns, the executive said. Lenders want a unified set of rules for invoking performance bank guarantees, which are issued against the progress of a contract.
They believe that concessioning authorities often invoke these for minor deviations in infrastructure projects, creating a double burden for lending institutions.
This issue is compounded by arbitral disputes between the parties, further delaying the projects.
Bankers also want timelines fixed for concessioning authorities to decide on compensation if a project is delayed on account of reasons such as land acquisition that are beyond the remit of the project developer.
Experts said that operational issues over concessions and performance bank guarantees impact the financial supply chain that is core to the success of the government’s infrastructure focus.
“Helping resolve the issues that financial institutions face will ensure smooth going for the infrastructure build out in the country,” said Vivek Iyer, partner at consulting firm, Grant Thornton Bharat.
According to an impact analysis of the RBI draft rules by ratings agency CareEdge Ratings, defining a specific credit event and implementing a resolution plan in a time-bound manner will necessitate increased monitoring and timely reviews from all stakeholders.
Banks argue that comprehensive rules are required so that these issues are resolved or the whole liability is on the banks with no skin in the game for some stakeholders, including the monitoring authorities.
Lenders have also sought greater immunity for their board members for commercial decisions and will reiterate their demand for norms, such as the exemptions granted to top executives of the National Bank for Financing Infrastructure and Development (NaBFID).
“The burden of supporting infrastructure finance will totally fall on state-run banks as private sector financial institutions will shy away on account of such high provisioning norms as proposed by the RBI,” said another bank executive.
Even for existing projects, if the interest rate goes up by as much as a percentage point, it will get difficult to recover loans from borrowers.
Under the proposed guidelines issued by the RBI on May 3, lenders will be required to set aside up to 5% of outstanding exposure as provisions during the construction phase of projects, compared with the current 0.4%. This will reduce to 2.5% when the project is operational.
