2024-08-26 23:41:00
Facing criticism from both lenders and the finance ministry, the central bank is treading carefully to ensure that the new norms do not lead to higher costs and make projects unviable. However, the central bank is determined to increase provisions for such projects and implement them among regulated entities to guard against risks in an industry known for delays.
“Right now, the idea is to implement these norms slowly and make provisions in phases so that the margins of lenders are not impacted much. Project finance lenders will be given enough time and take due care to ensure that project financing is not affected,” said a person with direct knowledge of the RBI’s thinking.To be sure, the draft guidelines issued in May stipulated that all regulated entities would need to make 5% provisions in phases when a project is in the construction phase.
Significant increase
To achieve this target, a three-year path has been proposed: 2% in fiscal 2025, 3.5% in fiscal 2026 and 5% in 2027. This will sharply increase the current fixed standard asset provision of 0.4% on project loans. The central bank’s idea is to defer the start of these provisions by a year or increase the number of years for which full provisioning is made. However, the person cited above said the decision has not yet been taken. “For projects that are a few months away from operations, some exemptions may be allowed on a case-by-case basis,” the person said. A spokesperson for the Reserve Bank of India did not respond to an email seeking comment. The draft norms stipulate that for projects with cumulative delays of more than two years in the date of commencement of commercial operations (DCCO) for infrastructure and non-infrastructure projects and more than one year, lenders should keep an additional specific provision of 2.5% over and above the applicable standard asset provision.
Lenders, however, are more concerned about the rules, which say that provisions must be made retroactively even for projects for which loans were previously disbursed.Besides banks, infrastructure finance companies such as Power Finance Corp and Rural Electrification Corp, which have accumulated more than 1,500 crore in loans between them, are likely to be the most affected.
“Phase-based implementation is good, but increased provisions will eventually hit profitability and make financing of these projects unviable. This is in stark contrast to the government’s push to boost infrastructure development,” said a senior bank official.
Financial sector executives said strong opposition from lenders and the finance ministry has led the RBI to reconsider. “The government has raised a lot of questions in the past few months. The main issue is that the RBI guidelines do not differentiate between the hybrid annuity model (HAM) and the fee model, or even solar projects. The risks of the three models are different. The probability of default calculated by the RBI is also on the high side, which means solar projects that rely on debt financing will definitely feel the pinch,” said another financial sector executive.
Unlike toll roads maintained by the private sector, the HAM project involves the participation of the National Highways Authority of India (NHAI), which greatly reduces the risk. In addition, solar energy is a key component of the government’s infrastructure plan, which expects a total investment of more than Rs 11,000 crore this fiscal year. Financial executives said curbing infrastructure lending will directly affect the government’s economic growth target of 7% this fiscal year.
1724825535
#RBI #soften #blow #tighter #infrastructure #financing #rules
