Tweak draft project loan financing norms

Instead of a blanket 12-fold jump in the provision requirement, the RBI can ask lenders to create project finance reserves on their balance sheets

- TAMAL BANDYOPADHYAY

On May 3, the Reserve Bank of India (RBI) released a draft direction outlining the prudential framework for project loan financing. The objective is to strengthen the existing regulatory framework and harmonise the norms across the lending community, including all kinds of banks, financial institutions, and non-banking financial companies (Nbfcs).

The regulator has invited comments on the draft direction by June 15. Better late than never. Let me offer some comments and feedback through this column.

Indeed, there are many positives in the draft norms. For instance, in projects financed under consortium arrangements, where the aggregate exposure of the participant lenders is up to 1,500 crore, no individual lender shall have an exposure of less than 10 per cent of the aggregate exposure. For projects where the aggregate exposure of lenders is more than ₹1,500 crore, the floor for individual exposure is fixed at 5 per cent or ₹150 crore, whichever is higher.

This will help lenders manage the risks better. One of the key reasons why public sector banks ended up with a high volume of bad loans in this segment in the last decade was their herd mentality. Whenever a large bank took exposure to a project, relatively smaller banks rushed to join the band of lenders without appreciating the risks to their balance sheets.

Lenders wishing to engage in project financing must have a boardapproved policy for the resolution of stress in projects if they turn bad. They are also expected to continuously monitor the build-up of stress in the project and initiate a resolution plan well in advance.