The Reserve Bank of India (RBI) has raised concerns over the high level of defaults in the project finance portfolio of banks. The banks have been releasing funds without insisting on the borrower bringing in the margin upfront for select projects. | |
| The banking regulator has observed that the banks were forced to lend more to keep the project going as delays could result in the project becoming a non-performing asset (NPA). |
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| This lending practice has not gone well with the central bank. It has thus asked the Indian Banks' Association (IBA) to suitably advise member banks. FAULT LINES
- The Reserve Bank of India (RBI) has raised concerns over the high level of defaults in the project finance portfolio of banks
- The banking regulator has observed that the banks were forced to lend more to keep a project going as delays could result in the project becoming a non-performing asset (NPA)
- This lending practice has not gone well with the central bank, which has asked the Indian Banks' Association (IBA) to suitably advise member banks
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The IBA had conveyed the RBI's concerns on the high level of NPAs in the banks' project finance portfolio to the heads of all public, private and foreign banks. The IBA had also asked the banks to indicate the practice followed in releasing funds under the project finance portfolio. |
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| "We have reiterated the stipulation that the promoter's portion should be brought upfront, before the bank releases the line of credit. The banks at times give this a go-by and release funds without the borrower shelling out his portion as a result of which the project suffers. We found that in most cases, the banks were following the practice of asking the promoter to bring the margin upfront," said a senior IBA official. |
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| The banks usually follow a system where the borrower has to bring in the margin fund upfront after which the bank disburses the line of credit. A promoter has to shell out a margin of around 15 to 50 per cent of the project cost. |
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| The promoter may be required to bring in only a portion of this upfront and thereafter, on a pro-rata basis, with each time the bank releases funds the promoter brings in his portion. |
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| "If the borrower is unable to bring in his portion, the banks may ask the borrower to bring in another promoter or acquire equity in the project. However, as the investment is locked up, the banks are forced to release funds to keep the project going, as a delay could result in the project becoming a non-performing asset," said a senior banker. |
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