Bankers hold their breath as RBI mulls tightened lending norms for infrastructure projects
The Reserve Bank of India (RBI) has proposed stringent guidelines for how banks fund large infrastructure developments like power plants, mines and transport systems. As per a draft framework released by the central bank, lenders may have to set aside more cash reserves to offset potential loan defaults from these complex projects.
Dubbed ‘project financing', this method allows banks to primarily consider revenue generated by the infrastructure work to decide repayment schedule and security. However, rising risks in this space has pushed RBI to strengthen monitoring and restructuring rules.
As per financial analysts, raising standard provisioning on all existing and new project loans from the current 0.4% to 5% can impact lenders. Estimates suggest banks may need to allocate an additional 0.5 to 3% of their net worth to comply. This will diminish their capital buffers measured as Common Equity Tier 1 or CET1 ratio by 7 to 30 basis points.
For non-bank financiers, the extra reserves won't affect quarterly earnings but will reduce available capital. Infrastructure focused NBFCs like REC, PFC and IREDA may experience a 2 to 3% reduction in their capital adequacy. Over the long run, such tightening could dampen lender appetite for funding massive infrastructure ventures.
While the draft allows provisioning to be stepped down once projects become operational, looming uncertainty has sent banking stocks lower. Investors will look for the RBI's final decision on calibrating growth and stability in project financing – a pivot for India's infrastructure vision.
