The Reserve Bank of India (RBI) released draft guidelines on project finance provisions on May 3, aiming to prepare the banking industry for a transition from the current incurred loss based provisioning model to the expected credit loss (ECL) regime, taking advantage of the current robust financial health of banks, according to experts.
Lenders and infrastructure sector players are seeking relaxation in provisioning norms and a lengthening of the moratorium on repayments in response to the RBI’s draft guidelines on the prudential framework for project loan financing.
The guidelines
Under the proposed guidelines, banks would need to set aside 5% as provisioning for project loans, a requirement that industry stakeholders argue is too stringent. They argue that the high provisioning requirement, particularly during the construction phase, does not adequately reflect the lower risk profile of completed projects, especially those backed by government contracts. They suggest that provisioning should be reduced to around 1% or even lower once projects are completed and operational.
‘No reason to worry’
Many see the guidelines as promoting responsible investing by encouraging the funding of viable projects to reduce the risk of project failures.
Given the current strong financial health of banks, it would allow them to make adequate provisions for a more robust balance sheet, they said. Any effects from the circular will be manageable, with some impact on borrowers and some absorbed by the bank, according to experts.
Regarding potential business impacts, the expert noted that customers will understand the higher provisioning requirements. The move may slightly affect margins for builders, but not significantly for banks. Builders could pass on these increased costs to consumers.
The concerns
Additionally, concerns have been raised about the proposed moratorium period not exceeding six months after the Date of Commencement of Commercial Operations (DCCO). Industry representatives argue that projects often require more time to stabilize and generate sufficient cash flows, suggesting that a more realistic approach to moratorium periods is needed.
Some experts and industry leaders have expressed reservations about the 5% provisioning requirement during the construction phase, suggesting that it reflects a lack of confidence in banks’ project appraisal processes.
