Indian banks, both from the public as well as private sectors, will have to make an incremental provisioning of 10 to 20 basis points because of the central bank’s draft rules for project finance, said a Care Edge report on May 27.
“For public sector banks, the impact of incremental provisioning would be up to 20 bps for each of the next three years, whereas for private sector banks, it would be up to 10 bps for each of the years from FY25 to FY27,” the report said.
The report also said that banks are also likely to prepare for the adoption of the expected credit loss (ECL) framework over the period and the implementation of ECL provisioning could overlap with the implementation of these provisioning norms.
For non-bank financial companies, the implementation, if carried out in its current form, is anticipated to have limited impact on NBFCs, excluding NBFC-IFCs, as Tier 1 capital is expected to reduce by up to 83 bps over three years.
“For NBFC-IFCs, the Tier 1 capital is expected to reduce up to 120 bps (as loans guaranteed by the Centre and state governments are expected to be outside its preview),” the report said.
Also read: RBI proposes tighter rules for project finance
The Reserve Bank of India (RBI) on May 3 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.
Another burst of infrastructure projects is on the cards as the government works towards boosting 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 Rs 15 billion ($179.92 million) must have an exposure of at least 10 percent.
The floor could be set at 5 percent 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 more 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.
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