L&T CFO says RBI's proposed tighter infra lending norms will promote higher quality and cost effective projects

R Shankar Raman, CFO, L&T

The Reserve Bank of India's (RBI) proposal to increase the stickiness of lending to the infrastructure segment will help promote selectivity, quality, and timely completion of infrastructure projects, engineering major Larsen and Toubro's Chief Financial Officer R Shankar Raman told Moneycontrol on May 10.

In an exclusive interview with Moneycontrol, Shankar Raman said that his point of view about the RBI's new proposal might look harsh, but that the central bank's recommendation was very responsible and will force lenders to undertake a lot of diligence and care in choosing the projects where funds have to be lent.

"India is a resource-scarce nation, and the RBI's proposal will promote selectivity when investing in projects and also help promote contractors that have a history of completing projects in a timebound manner," Shankar Raman said.

He added that RBI has given the right signal by telling the lenders "to please back projects which are capable of completion within cost within time."

"We've had enormous instances where the projects were awarded to less than capable contractors, the projects we have never completed even if they are completed they are completed with cost and time or and that locked in more of the bank resources," Shankar Raman said

He also said that in the short term, the RBI's proposals may lead to some rationing of resources but in the medium to long term he expects the proposal to support good projects.

He added that the Reserve Bank has promoted responsible investing as part of its drafts.

"I think all the regulators and the central bank are keen that the right projects get investment because funding is limited in India," Shankar Raman said.

On May 3rd the RBI 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.

Banks have already stated that they may be looking to reprice infra loans, with State Bank of India’s chairman Dinesh Kumar Khara on May 9 saying that the SBI may reprice infra loans.

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 percent of the loan amount when the project is in the construction phase.

This can be reduced to 2.5 percent when a project becomes operational and 1 percent 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 percent, 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 percent.