Indian bankers are not expecting much relief from the Reserve Bank of India (RBI) on the draft project finance regulations announced on May 3, despite providing comments to the regulator that the new rules will have a significant impact on their earnings.
The RBI requires lenders to set aside 5% of their standard assets or loans to offset project losses during the building phase. Though this rule will take effect in FY27, banks estimate that the incremental impact on credit costs will be between 0.5 and 1.75 percent. Nonetheless, industry sources indicated any easing in provisioning by the RBI is unlikely.
"We have made our argument to the regulator, and some have stated that excessive provisioning requirements may dissuade mid-sized institutions from taking on project finance exposures. However, based on the comments we've gotten thus far, one should prepare for a scenario in which lenders may not be allowed much discretion," said a top official of a state-owned institution.
In other words, industry participants expect the final project finance circular would not be much different from the draft circular.
"The new project financing standards are intended to coincide with the RBI's June 7, 2019 circular in order to facilitate early identification and resolution of stress, particularly in big loans. Allowing any leniency could be counterproductive to this goal, thus large dispensations as demanded by the industry are doubtful," said a high-ranking source who declined to be identified. The Reserve Bank of India's June 7, 2019 circular addresses the prudential framework for the resolution of stressed assets.
Furthermore, the draft rules are expected to match provisioning standards with expected credit loss (ECL) criteria. Banks are expected to adopt ECL regulations in FY26, despite the fact that the RBI has issued no explicit direction on the subject.
Hopeful for Some Grandfathering
Some bankers believe that, while the RBI may not change its 5% provisioning rule, existing project finance norms may be relaxed. "If existing loans have been brought under the proposed project finance norms in one go, it may alter the viability of the project and hence we have sought for some handholding for these exposures," according to a banking professional.
Likewise, the industry feels that the clause requiring a positive Net Present Value (NPV) may be relaxed. According to the draft guidelines, an NPV is required for any project supported by lenders. "Any subsequent diminution in NPV during the construction phase, either due to changes in projected cash flows, project life-period or any other relevant factor which may lead to credit impairment, shall be construed as a credit event" . Bankers have recommended that if the NPV changes from negative to positive again, they should be permitted to reverse provisioning.
