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Mumbai: Banks will have only a ‘limited ability’ to pass on the impact of the proposed increase in project loan provisions due to the intense competition among lenders and the pressure to maintain relationships with large corporates. Officials from some of the large banks conveyed this to the Reserve Bank of India (RBI) last week, people with knowledge said.

On May 3, the RBI issued draft norms proposing a 5% provision for existing and new project loans, commercial loans, and real estate loans against 0.4% to 1% stipulated on such loans by the regulator.

Banks have told the RBI that they will have to absorb the impact of the higher provisions, which will, in turn, affect their earnings.

“Ideally, when the RBI increases provisions on any sector, lenders pass on the impact to the borrower by a proportionate hike in lending rate,” said a senior bank official. “However, currently, banks are facing competition from large state-owned finance companies who are aggressively pricing the loans to gain market share. As a result, interest rates charged on such loans do not accurately represent the tenor or credit risk premium. Due to this mispricing of loans, the RBI may have proposed a hike in provisions,” the same bank official said.

However, if lenders are unable to pass on the impact to corporate borrowers, it may defeat the purpose of issuing these guidelines.

Currently, banks charge between 9.75% and 10% for best-rated infrastructure loans. The new rules will be effective for existing projects as well, but banks may have limited ability to raise lending rates on existing projects, lenders said.

Raising lending rates midway through a project under construction could impact its viability, which the borrower may not have factored in while bidding for the project, a senior official from a rating agency said.

For large commercial banks, the provisions could well exceed ₹3,000 crore-4,000 crore, while for a mid-sized bank, it would range between ₹700 crore and ₹1,000 crore, the same official from the rating agency said.

At present, banks must provide 1% for commercial real estate loans, 0.75% for residential home projects, and 0.40% for all other loans, including project loans. The RBI proposed raising this to 5% during the construction period and thereafter to 2.5% upon achieving commercial operations.

The banking regulator proposed to raise the rates in a phased manner wherein standard provision will be 2% in March 2025, 3.5% in March 2026 and 5% by March 2027. The RBI has said that the date of commencement of commercial operation an be extended up to three years for infrastructure projects and two years for non-infrastructure projects without downgrading it to non-performing loans.

  • Published On May 21, 2024 at 08:24 AM IST

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