Context:
The framework that was put in circulation in May 2023 wanted to add impairment checks so that regulation is maximally strengthened and lending procedures are brought together across the banking, NBFC, and financial institutions fold.
Provisions, under the draft, mooted the requirement of 5% provisioning for construction projects, reducing to 2.5% upon completing the construction and further down to 1% for those that generate strong and steady cash flows. The banks contested that this was too high and wanted an upfront requirement of 1% during the construction period, which would later increase to 3% depending on delays.
(RBI) Project Financing Framework
- The project financing framework formulated by the Reserve Bank of India (RBI) aims to strengthen the regulatory backbone for long-term project financing. This framework would provide a uniform prudential framework for financing projects.
- Features of the RBI’s project financing framework
- Revising the criteria for changing the date of commencement of commercial operations (DCCO) of projects
- Analyzing the risks inherent in such financing
- Requiring lenders to set aside 5 percent of their standard assets or loans to cover losses during the construction phase of the project
Key Industry Concerns Brought Up for RBI’s Rebuttal
- Provisioning Burden
- Banks are concerned that a 5% provisioning requirement would eat into profits, along with adversely affecting project viability.
- They propose a graded provisioning based on the completion and delay of projects.
- Moratorium Period
- The six month moratorium period in the draft is unrealistic as repayment schedules vary across projects.
- The industry wants flexibility based on project specific grounds.
- Net Present Value (NPV) Concerns
- The RBI draft suggests that a project must have a positive NPV for it to be eligible. Some banks argue that there must not be a credit event for temporary decline in NPV (due to change in cash flow projection), hence banks require the right to reverse provisioning if NPV recovers post construction.
RBI Position & Going Forward
- As for the ongoing review process, RBI governor Sanjay Malhotra has confirmed that all suggestions so far made are under consideration.
- He has given an assurance that any major changes will therefore be given a phased period for implementation.
- These likely final norms would balance the regulatory aspect within the set norms but also would heed the ground position from the industry.
As the consultations are thus set to restart, the concluded project financing norms would see some changes with respect to provisioning, moratorium terms, and NPV requirements. This decision will map the landscape of infrastructure financi
