NBFC body to soon write to RBI on new draft project financing norms

RBI NBFC

The body representing non-banking financial companies (NBFCs)—the Finance Industry Development Council (FIDC)—will raise issues and concerns regarding the draft rules for funding infrastructure projects with the Reserve Bank of India, people aware of the development told Moneycontrol on May 17.

"FIDC is going to write a letter to RBI on draft norms of project financing before the deadline," one of the persons said.

The source said that one highlight in the letter will be reduction in provisions proposed by the central bank in the draft norms, adding, “Apart from this, there will be some other points which the FIDC team is discussing internally.”

On May 3, the central bank 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 2012-13 on account of "exuberant" lending, which led to a strain on the country's banking system.

Sources said that the industry body has not yet decided a timeline.

“As now, FIDC has not decided any date for writing a letter. FIDC will not write anything to the finance ministry on these draft norms,” the said.

Also read: Centre reviews draft RBI rules for higher provisioning in infra projects, lenders may oppose

The RBI has suggested that when a project is in the construction phase, lenders set aside a provision of 5 percent of the loan amount. This will be reduced to 2.5 percent once the project is operational.

The required provisions will further be cut to 1 percent once the project has adequate cash flow to repay current obligations.

The lenders are required to make the 5 percent provision in a phased manner: 2 percent in FY25, 3.5 percent in FY26, and 5 percent by FY27.

Currently, lenders are required to have a provision of 0.4 percent on project loans that are not overdue or stressed.

Also, banks should have clear visibility on the date on which a project is expected to begin commercial operations and increase provisions in case of delay. Any time overrun beyond three years from the start of an infrastructure project should change the classification of the loan from standard to stressed.

Also read: RBI’s draft norms remind banks of building an umbrella for credit risk

Earlier this week, the public sector Power Finance Corporation during a press conference said the recent draft guidelines will not impact profitability, and that the company has sufficient capital to counter the provision if it is implemented.

"We are examining those guidelines in detail, but we understand that these guidelines have been issued for the projects under implementation. I would like to say that in such a case, on profitability, we are not going to have any impact," Parminder Chopra, chairperson and managing director, said.

"We have a very comfortable capital adequacy (ratio) of about 25 percent as against minimum RBI's requirement of 15 percent and our tier one capital is also more than 50 percent as against the capital guidelines of RBI. So we are not expecting any major impact on those guidelines," she added.

Higher provisions, according to brokerage CLSA said, will only impact the impairment reserves of  PFC and REC (another PSU) and will not drag down their profits as both companies are well-capitalised.

The RBI has sought feedback on  the proposal by June.

According to the CLSA report, NBFCs follow IndAs accounting (Indian Accounting Standard), which is different from that of banks.

Earlier on May 17,, Moneycontrol reported that LIC Housing Finance MD and CEO Tribhuwan Adhikari said the company would adopt a cautious stance on the project loans segment as it is seen as a high-risk category.

“We will be cautious and guarded as our past history is not very good in the project loan space for a particular period. We are guarded as it has an element of high risk and a cautious approach will be a part of this,” Adhikari said at a press conference in Mumbai on May 16.