CAUGHT BETWEEN CAUTION AND GROWTH

RBI's draft on project financing seems to be a pre-emptive measure to prevent large defaults on infrastructure loans. However, in their current form, the requirements look onerous for banks

Recently, the Reserve Bank of India (RBI) released draft regulations on financing for projects which are under implementation. Among other things, the draft regulations propose hiking provisioning for banks’ exposure to under-construction projects to 5% from the existing 0.4%. The comments on the draft regulation are invited from the public and stakeholders by 15th June ’24.

Given the complex nature of project finance in India, the central bank seems to address the underlying risks in the segment with the revised guidelines. Since times are good for the banking industry currently in terms of growth, profitability and bad assets, the RBI wants to increase provisioning with an aim to make the Indian banking industry healthier in the future.

But the news has not been well received by the stock markets. Shares of state-owned banks and non-banking finance companies with exposure to project finance took a heavy beating on the bourses post-release of the draft norms.

The impact of the proposed higher provisioning for under-implementation projects would be significant for the banking industry. Higher provisioning means lower profits for banks.

If higher provisioning cost is passed on to project developers, project finance costs would go up thereby impacting the viability of projects. This would diminish the bidding appetite of developers in the medium term, impacting lenders’ credit growth. Let’s check out the details and the likely impact.

THE DRAFT