Indian Banks Association appeals against RBI’s project finance proposal

Infra-project financing:  lenders in country are gearing up to challenge a stringent proposal by Reserve Bank of India (RBI) aimed at tightening regulations for infrastructure project loans, as per sources familiar with matter.

Indian Banks Association (IBA) is in process of garing feedback and intends to communicate its opposition to Reserve Bank of India (RBI) regarding proposed increase in provisions for under-construction projects.

" provisioning requirement appears to be on higher side," remarked SL Jain, CEO of state-owned Indian Bank, ding that discussions with IBA are underway to dress issue and formally request a reconsideration from RBI.

central bank's proposal, announced on Friday, suggests that banks allocate 5 per cent of loan amount as a provision for projects in construction phase, with provision reducing to 2.5 per cent upon project completion and furr to 1 per cent once a certain level of cash flow is achieved.

This justment could potentially translate to a 1-1.5 percentage point uptick in interest rates for project finance loans, warned a senior banker at an infrastructure finance institution, particularly impacting sectors like renewable energy operating on slender profit margins.

While government is yet to solidify its stance on regulations, concerns over unintended consequences such as reluctance among lenders to fund under-construction projects are being deliberated, according to a source familiar with government's perspective.

proposed rules remain subject to modification based on feedback received until June 15.

In response to queries, IBA refrained from immediate comment.

proposal has triggered a sell-off in shares of government-owned banks and non-bank lenders specialising in infrastructure and project finance, with analysts cautioning that heightened provisions could erode profitability and discourage lending in this segment.

Macquarie, in a recent research note, cautioned that if implemented unchanged, se regulations could substantially impede recovery of project finance and capital expenditure in economy.

(With Reuters inputs)