Why Are Banks Worried About RBI’s New Project Finance Rules?
May 23, 2024
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The podcast discusses RBI's new project finance rules impacting infrastructure funding. Banks worry about increased provisions affecting profitability. An in-depth analysis with experts on the benefits or hindrances of these norms for the sector.
RBI's new project finance rules aim to increase accountability and viability of infrastructure projects through higher provisions for loans.
Debate surrounds the impact of higher provisions on banks' profitability and capital costs, raising concerns about potential effects on project financing.
Deep dives
RBI's Proposal for Project Financing Guidelines
The Reserve Bank of India (RBI) has introduced new comprehensive guidelines for project financing in the country. These guidelines aim to change the way infrastructure and real estate projects are funded through debt by increasing loan provisions to a uniform rate of 5% for various project types. The RBI's rationale behind these rules is to ensure higher accountability and project viability, as evidenced by many delayed and over-budget projects evaluated in a recent comprehensive check by the Ministry of Statistics and Program Implementation.
Implications for Banks and Infrastructure Companies
The new rules will impact both banks and infrastructure companies significantly. Banks will face the challenge of higher provisions affecting their profit and loss statements, potentially leading to cost capital increases. Infrastructure companies will need to adhere strictly to project timelines and ensure 50% land possession, intensifying monitoring and leading to stricter consequences for delayed projects, such as loan restructuring within set timeframes. These changes may elevate costs of capital and streamline project completion.
Critiques and Responses to the Guidelines
The proposed guidelines have sparked a debate among stakeholders. While some argue they promote prudence and quality in project financing, concerns have been raised about the timing and potential adverse effects on infrastructure projects. Critics highlight the possible rise in interest rates, challenges in obtaining target returns, and restrictions on moratorium periods, possibly affecting renewable and hydro projects. There is also debate about the role of banks in project financing versus specialized institutions, as questioned by Finance Minister Nirmala Sitharaman, signaling potential shifts in the project funding landscape.
The Reserve Bank of India's (RBI) proposed changes for project financing could significantly alter how infrastructure and real estate projects are funded. The central bank has suggested increasing the provisioning for all project-backed loans to enhance accountability and project viability. A recent government survey of 1,873 projects revealed substantial delays and cost overruns, highlighting the need for stricter regulations. Yet, the new guidelines have sparked debate among banks and companies, who argue that higher provisions could impact profitability and increase capital costs. With stakeholders invited to comment until June 15, host Anirban Chowdhury delves into whether these norms will ultimately benefit or hinder the sector. Tune in to The Morning Brief podcast for an in-depth analysis from Anil Gupta, head of financial sector ratings at ICRA, Shravan Sampath, a renewable energy sector professional, and ET’s Sangita Mehta.