Lenders expect little relief from RBI on project finance norms

Though this requirement would come into play over a period of three year with effect from FY27, banks are estimating that the incremental impact on credit costs could go up by 0.5 – 1.75 percent

Indian lenders aren’t expecting major relief from the Reserve Bank of India (RBI) on the draft project finance norms issued on May 3 despite providing feedback to the regulator that the new rules would significantly impact their profits.

The RBI norms require lenders to set aside 5 percent of their standard assets or loans to cover losses during the construction phase of the project.

Though this requirement would come into effect from FY27, banks are estimating that the incremental impact on credit costs could go up by 0.5 – 1.75 percent.

Nonetheless, industry sources said any relaxation from the RBI on the provisioning front is quite unlikely.

“We have made our case to the regulator, and some have, in fact, indicated that it could be a deterrent for mid-sized lenders to take on project finance exposures if the provisioning requirements are very high. However, going by the feedback we have received so far, one needs to brace for a scenario where there may not be much leeway given to the lenders,” said a top official of a state-owned lender.

In other words, industry participants believe that the final project finance circular may not be very different from the draft circular.

“The intent of the draft project finance norms is to align it with RBI’s June 7, 2019 circular in order to enable early identification and resolution of stress, particularly in large loans. Allowing any leeway could be counterproductive to this objective and hence it is unlikely that major dispensations as requested by the industry may be allowed,” said a highly placed source who didn’t want to be identified. RBI’s June 7, 2019 circular pertains to prudential framework for resolution of stressed assets.

Further, the draft norms are also expected to align the provisioning norms with expected credit loss (ECL) requirements. It is anticipated that ECL norms may be adopted by banks in FY26, though there is no formal directive from the RBI on this regard.

Hopeful of some grandfathering

Some bankers are of the view that while the RBI may not budge on the 5 percent provisioning requirement, some relaxation could come through for existing project finance norms. “If existing loans have be brought under the proposed project finance norms in one go, it may alter the viability of the project and hence we have sought for some handholding for these exposures,” said a banker.

Likewise, the industry also believes that the clause pertaining to maintaining positive net present value (NPV) may also undergo relaxation. According to the draft norms, a NPV is a prerequisite for any project financed by lenders. “Any subsequent diminution in NPV during the construction phase, either due to changes in projected cash flows, project life-period or any other relevant factor which may lead to credit impairment, shall be construed as a credit event”. Bankers have suggested that if NPV swings from negative to positive once again, they should be allowed a reversal in provisioning.