Commercial banks are planning to write to the Reserve Bank of India (RBI), seeking a lower provision rate of 1-2 per cent as compared to the 5 per cent proposed in the recent draft norms on project finance. These draft norms propose to increase standard asset provision to 5 per cent, even for existing loans, from 0.4 per cent currently.
Such an increase in provisioning requirements could push the financing cost of projects, potentially rendering them unviable, argue bankers and experts. According to industry executives, lenders would suggest a 1 per cent standard asset provision for government or public sector projects, given the lower risk involved. For other projects, they would propose a 2 per cent provision.
The RBI recently released draft norms on the 'Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances Projects Under Implementation'.
These guidelines propose a phased 5 per cent standard asset provision during the construction phase.
A senior banker from a large public sector bank expressed concerns, saying: "For existing proposals, which are under construction and for which financing has already happened, if the provisioning is increased to 5 per cent, the economics of the project could be doubtful. One does not know if the project will still be viable."
The official further said the sudden increase in provision to 5 per cent of the loan amount could "threaten the viability of existing cases", which have been assessed based on certain presumptions.
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