Until six months ago, the direction of nudge — whether from the government or the central bank — was clear: it was towards retail loans and SME lending. With stress now building in both sectors and banks becoming increasingly cautious, are we witnessing a visible shift in favour of big-ticket corporate loans? Three recent developments suggest this might be the case.
First, there’s the final version of the project finance circular, which seems to have yielded to every demand from Corporate India. Forget the reduction in provisioning from 5% to 1.5%; that’s a mere numeric factor. The more significant point is the flexibility granted in extending the DCCO (Date of Commencement of Commercial Operations), which raises the question: Is the regulator now willing to cut corners to revive large project funding and make it a crucial line of business again, at least for the top 10 banks in the country?
Likewise, earlier this week, the regulator reduced risk weights on NBFC lending to infrastructure loans and removed the Rs 10,000 crore cap on entity-level exposures. Even more striking is that acquisition finance is no longer a "no-go" zone for scheduled commercial banks. With the cost of funds as low as 6-6.5% for the top 10 banks (5.5% for large PSU banks), these institutions, which already fund the five or six large conglomerates at competitive rates, can offer more attractive deals compared to alternative credit outfits. But two key questions remain: Who will fund these loans, and what happens to asset quality?
Lack of Lenders
In the past, major players like SBI, IDBI, ICICI, and Axis fought fiercely for large infrastructure loans, including project financing. However, following the 2015 asset quality cycle, these once highly coveted clients have become problematic for banks. The number of lenders willing to take on large corporate borrowers has sharply reduced, and the pricing war has become more intense since 2022. In the NBFC space, apart from the state-owned PFC, IRDEA, and NABFID, private sector participation is virtually absent. The private sector, which once boasted players like IL&FS, Edelweiss, Indiabulls, and SREI, has mostly disappeared from the list. Even players like Aditya Birla Capital and Piramal, once active in this space, have shifted their business models. The key question now is: who will be interested in funding these large loans? Or, are we at the inflection point where new wholesale lending NBFCs may emerge? Time will tell.
Loosening the Noose on Asset Quality?
Another significant question is whether the recent relaxations — on project finance, entity-level exposure, and reduced risk weights for NBFC loans to infrastructure projects — will prove to be effective in preventing another asset quality crisis. These changes seem to be designed as incentives to encourage banks and NBFCs, but they also carry the risk of potentially lowering safeguards too soon. These norms were introduced after thoughtful consideration of the damage caused by the asset quality issues of 2015. So, are we relaxing these checks prematurely, carried away by the present health of India Inc.?
For now, it is understood that while these relaxations are extended at the lending entity level, they will be monitored through a macro-prudential framework. Though a motherhood statement, this places an enormous responsibility on the regulator to ensure no accidents occur. In other words, the RBI’s inspection and supervision processes must be watertight in both theory and practice. This is a tall order and a massive responsibility for the regulator to bear.
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