Indian Banks Association appeals against RBI’s project finance proposal

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

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

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

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

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

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

In response to queries, the IBA refrained from immediate comment.

The 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, these regulations could substantially impede the recovery of project finance and capital expenditure in the economy.

(With Reuters inputs)