RBI proposes tighter rules for under-construction infra project financing

Mumbai, May 3, 2024 

The Reserve Bank of India (RBI) on Friday proposed to lenders that they set aside higher provisions for under-construction infrastructure projects and asked them to ensure strict monitoring of any emerging stress.

The RBI said it issued draft guidelines "taking into account the experience of banks with regard to financing of project loans".

Indian banks had seen large defaults across infrastructure loans starting 2012-2013 on account of exuberant lending, which led to a strain on the country's banking system.

India is now seeing another burst of infrastructure projects, driven by the government as it tries to boost the economy.

The RBI has proposed that banks set aside a provision of 5% of the loan amount when the project is in the construction phase.

This can be reduced to 2.5% when a project becomes operational and 1% after the project starts generating cash sufficient to cover the lenders' repayment requirements.

Project loans that were not overdue or stressed so far attracted a provision of 0.4%, as per a 2021 circular available on the RBI's website.

The central bank said lenders should monitor the build-up of stress in projects on an ongoing basis and initiate resolution plans well in advance.

The regulator also said lenders coming together in a consortium to finance projects worth up to 15 billion rupees ($179.92 million) must have an exposure of at least 10%.

The floor could be set at 5% for larger projects, the RBI said.

It asked banks to have clear visibility on the date on which a project is expected to begin commercial operations and increase provisions in case operations are delayed.

Delays greater than three years for infrastructure projects should prompt a change in the classification of the loan from standard to stressed, the central bank suggested.

The RBI has sought comments on its proposals by June 15 before finalising the rules.

[Reuters]