Impact of RBI’s Draft Provisioning Norms on Under-Construction Projects

Under the newly released  draft guidelines of RBI, the sharp increase in provision for standard assets to 5 percent for all fresh and existing project loans in ongoing infrastructure/construction  projects will have a direct impact on the cost of debt, in turn dampening the bidding appetite from infra developers in the medium term. This, according to CareEdge, may further restrict top up loan raising ability of all types of infrastructure projects.

Banks may need 0.5-3 percent additional provisioning . However banking experts believe that  banks will be able to absorb the additional provisions requirement though pricing of loan may have to be revisited. They opine that the move is good for sector’s long-term stability though the real picture may emerge following the release of revised guidelines of RBI taking into account the suggestions from the industry.

Neeraj Bansal, Partner Risk Advisory, Co-Head &  COO-India Global KPMG in India

According to the draft guidelines  of RBI, banks should set aside 5 percent of loan amount when the project is in the construction phase. This can be reduced to 2.5 percent  when the project becomes operational and 1 percent when  the project has sufficient  cash flow to repay current obligations. Currently, lenders  are required to have a provision of 0.4 percent on project loans that are not stressed. Besides this, lenders should have clear visibility on the project commencement timeline and increase provisions in case of delays. . Any delays greater than 3 years should prompt a change  in the loan classification from standard to stressed.

While it is a strategic move to strengthen the banking sector from a risk management perspective, it will increase the project financing cost due to potentially higher interest rates, reduce lenders’ profits and limit their  flexibility to act under different scenarios.

Anuj Puri, Chairman, Anarock

The move by the RBI to raise provisions  and guarantee tighter monitoring is probably going to help the banking industry as a whole by  reducing the risks connected to infrastructure loans. On under-construction infrastructure and real estate developments , though this will have a cooling effect. To successfully negotiate the more constrained  finance environment, developers will need to adjust  by investigating new financing  options , streamlining project execution and enhancing  risk management procedures.

Ashwinder Singh, CEO, Residential, Bhartiya Urban

The RBI’s draft norms require banks to make higher provisions  for infrastructure lending in order to prevent  defaults  in high stake projects. The move demands  innovative financing strategies  to sustain growth and ensure project viability. Industry leaders must focus on enhancing financial prudence  to meet regulatory expectations.

Angad Singh  Bedi, Managing Director, BCD Group

As per the recent RBI draft guidelines, higher provisions on loans should be kept aside by lenders for under construction projects. As of now, there should be a provisioning of 5 percent on loans which will be done in a phased manner. While the intention is is to mitigate  the risks and contribute to the overall economy, it may impact companies that are undertaking large infrastructure or construction projects. On a positive side, it will create more checks and balances and will ultimately pave the way for high value and compliant projects.

K Satyanarayna Raju, MD & CEO, Canara Bank

The RBi’s draft guidelines on project finance related provisions could be meant to sanitise the banking industry. There may be a little impact on the margins of builders.  The builders may then pass on cost hike to their consumers.