MUMBAI: Indian lenders have told the banking regulator that creating 5% provision buffers for all infrastructure projects would hurt both the financiers and viability of the proposed development initiatives, seeking about a dozen such amendments to a draft Mint Road circular that seeks to de-risk bank exposure to long-gestation assets.
Individual banks and the Indian Banks’ Association (IBA) have also urged the Reserve Bank of India (RBI) not to implement the new norms retrospectively since they would find it very difficult to change the negotiated terms in old loan agreements, banking industry sources told ET.
Bankers have said the norms be subsumed within new provisioning rules that will require lenders to pre-empt assessment on potential losses. “RBI is also in the process of finalising the expected credit loss (ECL) based provisioning guidelines,” said a senior bank executive. “So, there is a suggestion that these infrastructure norms be subsumed into those.”
In the draft guidelines published early last month, the RBI asked all regulated entities to provide for 5% of the infrastructure loan amount when a project is in the construction phase, progressively reducing that buffer to 2.5% when a project is operational and further to 1% after the project has adequate cash flow to repay current obligations and its long-term debt declines by at least 20% from the time of commencing commercial operations.
Six-month Moratorium
This substantially increases provisions from the flat 0.4% currently.
The IBA and individual banks have also listed the practical difficulties in implementing a six-month moratorium on repayments for all projects because such a short period is not feasible for all of the exposures concerned.
“The infra norms say that a loan moratorium cannot be beyond six months on loan repayments after the initially agreed date of commencement of operations, but this straight-jacketed approach is not practical since all projects are different,” said a top banker.
STAGE-GATED ROLLOUT
The accelerated provisioning norms for infrastructure exposures are expected to be implemented in a phased manner, 2% in fiscal 2025, 3.5% in fiscal 2026 and 5% by 2027.
Furthermore, the guidelines say the provisioning norms have been applied to both existing and upcoming projects, with no distinction between banks and NBFCs.
Lenders had to give their suggestions by June 15.
Bankers say that with an external working group on the ECL-based framework for provisioning by banks already in place, these new norms can be implemented along with them.
The ECL model proposed by the regulator expects banks to recognise stress earlier, in contrast to the existing regime where banks make provisions after incurring losses.
“The guidelines do not treat government owned infrastructure financiers like Power Finance Corp and Rural Electrification Corp differently than private financiers, which is not correct because they are sovereign backed and have a lower risk weight,” said the senior executive cited above.
Lenders have met both RBI and finance ministry to share feedback after the draft norms were released last month because the ministry wanted to assess the impact on infrastructure projects — a crucial area for the government.
The IBA did not respond to ET’s mailed requests seeking comment.
‘NO RETROSPECTIVE APPLICATION’
“Banks have clearly said that these norms cannot be implemented retrospectively because it is very difficult to change the terms in old loan agreements. It is better if it is implemented only for new projects,” said another bank executive.
All projects irrespective of their size were expected to carry higher provisions.
Banks have suggested that smaller projects – below `1,000 crore — be exempt from these norms because anyway projects below this value have little impact on bank books, and higher provisions could make these small projects unsustainable.
“There are also various discrepancies, like NHAI norms today say that 80% of the land for a road project should be acquired. In RBI norms, the limit is 50%,” said another banker.
“The guidelines also expect a 90% legally binding financial closure for all investment in infrastructure. While it is ok to expect this for loans, it is not practical to expect this for equity and bond investment in these projects.”
Separately, the Finance Industry Development Council (FIDC), which represents non-bank lenders, has suggested that instead of a flat provision of 5% for all projects in construction phase, the enhanced provisioning may be stipulated only for projects where there is an extension in the date for commencement of operations.
The norms have prescribed that in cases where the aggregate exposure of the participant lenders is up to Rs 1,500 crore, no individual lender shall have an exposure less than 10% of the aggregate exposure, or 5% or Rs 150 crore for projects of more than Rs 1,500 crore.
FIDC said the RBI should not prescribe minimum limits for financing and let it be decided by a commercial agreement between the parties.
Any difference in net present value (NPV) due to a change in cash flows should be reported to the RBI’s Central Repository of Information on Large Credit (CRILC). But FIDC said that NBFCs do not have access to CRILC.
“This will mean that there will be a lag for such information to come to the notice of NBFCs, through other lenders. We request NBFCs be provided the access,” FIDC said.
