RBI Suggests Stricter Guidelines for Project Financing

The Reserve Bank of India (RBI) proposed some stricter rules on Friday regarding lending to projects that are still in progress. According to the central bank’s draft rules, projects will be categorized based on their phase, and there will be higher provisioning, up to 5%, during the construction phase, even if the asset is considered standard.

It’s worth noting that during the last credit cycle, project loans were a major contributor to the stress seen on bank balance sheets. Typically, the standard asset provisioning rate stands at 0.40%.

Under the proposed guidelines, which were initially announced in September 2023 and elaborated on Friday, banks will need to set aside 5% of the exposure during the construction phase. This percentage will decrease as the project moves towards operational status.

Once the project reaches the ‘Operational phase,’ provisions can be reduced to 2.5% of the funded outstanding, and then further down to 1% under certain conditions. These conditions include the project having enough positive net operating cash flow to cover current repayment obligations to all lenders, and a reduction of at least 20% in the project’s total long-term debt with lenders compared to the outstanding amount at the time of achieving the Date of Commencement of Commercial Operations.

The proposed guidelines also detail stress resolution procedures, specify criteria for upgrading accounts, and outline recognition protocols. Lenders are expected to maintain project-specific data in an easily accessible electronic format. Any changes in the parameters of a project finance loan must be updated by lenders within 15 days of such a change. The necessary systems for this purpose are expected to be put in place within 3 months of the release of these directives.

The public has been given until June 15 to provide feedback on the proposals.