The Reserve Bank of India (RBI) plans to gradually implement increased provisioning for project financing to ease the burden on lenders and allow them time to adjust. According to The Economic Times (ET), the central bank may offer leniency in provisioning requirements for projects nearing completion.
The RBI’s decision follows concerns from lenders and the Finance Ministry. Critics argue that the new norms could raise costs, potentially rendering some projects unviable. Despite these concerns, the RBI is committed to increasing provisions to mitigate risks in the project financing sector, which has historically faced delays.
The central bank is considering delaying the onset of these provisions by a year or extending the time frame for full implementation. Additionally, projects nearing operational status may receive waivers on a case-by-case basis, according to the report. The draft norms also state that for infrastructure projects with a cumulative deferral of the date of commencement of commercial operations (DCCO) by more than two years (or one year for non-infrastructure projects), lenders must maintain an additional specific provision of 2.5 percent above the standard asset provision.
Lenders are particularly concerned about the requirement to apply these provisions retrospectively, impacting already disbursed loans. Infrastructure finance companies like Power Finance Corp and Rural Electrification Corp, which collectively hold over Rs 15 trillion in loans, are expected to be the most affected.
The report cautions that the overall increase in provisions could reduce profitability and make project financing less appealing, which contrasts with the government’s push for infrastructure development. This impact is particularly significant for projects like HAM, involving the National Highways Authority of India (NHAI), which are seen as lower risk compared to privately maintained toll roads. Discouraging infrastructure lending could have broader implications for the government’s ambitious plans, including over Rs 11 trillion in investment this financial year, and could hinder the goal of achieving 7 percent economic growth.