RBI wants lenders to allocate 5% for project loans

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) has proposed tighter rules to govern lending to projects under implementation. Under these draft regulations, lenders would be required to allocate 5% of the total loan amount as general provisions for existing and new loans.

This is significantly higher than the current provision of 0.4% for non-default exposures.

It can be noted that in the last credit cycle, project loans were seen to have led to a build-up of stress on bank books.

These provisions are proposed to be applicable to all categories of lenders, including banks and non-banking financial companies (NBFCs).

The RBI’s regulations outline provisions for both standard project loans, including infrastructure and non-infrastructure projects, as well as loans towards real estate.

According to the draft regulations, the 5% general provisions should be made on all existing and fresh project loans in the construction phase, i.e., before the date of commencement of commercial operations (DCCO).

Subsequently, standard provisions on project loans can be reduced to 2.5% once the projects are operational.

A further reduction to 1% of the funded outstanding would be allowed once the project demonstrates positive net operating cash flow sufficient to cover current repayment obligations and a reduction of at least 20% in total long-term debt with lenders.

The draft regulations propose a phased implementation for the 5% standard provision requirements for loans in the construction phase: 2% with effect from March 2025, 3.5% with effect from March 2026, and finally, 5% with effect from March 2027, spread over the four quarters of each financial year respectively.

The proposed guidelines also spell out details on stress resolution, specify the criteria for upgrading accounts, and invoke recognition. It expects lenders to maintain project-specific data in an electronic and easily accessible format.

Lenders will update any change in the parameters of a project finance loan at the earliest but not later than 15 days from such change.

The necessary system in this regard will be put in place within 3 months of the release of these directions, it said.

The public has been given time till June 15 to respond to the proposals.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow