RBI must review plan to raise provisions against infra loans: Lobby group

The lobby group for Indian non-banking lenders on Tuesday asked for a review of a recent proposal from the central bank calling for an increase in the provisions that lenders have to set aside against infrastructure project loans.

Last month, the Reserve Bank of India (RBI) proposed that banks and non-banking financial companies set aside a provision of 5 per cent of the total loan amount of infrastructure projects at the construction phase, a sharp jump from the 0.4 per cent required currently.

In a letter to the RBI, the Finance Industry Development Council (FIDC), which represents NBFCs, has opposed the move, suggesting the provision be retained at the current level, without citing a reason.

A copy of the letter has been reviewed by Reuters.

The required provision can be increased in the face of project delays, the letter, addressed to the RBI's department of regulation, said.

"This will ensure better project selection by the lenders."

Reuters previously reported that the rules, if implemented in the current form, could lead to a 1-1.5 percentage point increase in interest rates for project finance loans.

The FIDC has also opposed the central bank's suggestion that a minimum limit be imposed on lenders giving out loans to a project, as a way to ensure accountability for those joining a lending consortium.

Such decisions should be left to the commercial agreement between the parties, the FIDC said, instead suggesting lenders can be asked to join an agreement with debtors as a way to ensure that rights and duties of parties will be "clear, un-ambiguous and protected."

The NBFC body has also requested the RBI to clarify whether the draft framework will be applicable to loans which were extended prior to such guidelines where there is no common agreement between debtor and the lender.

The Indian Banks Association (IBA) is also expected to write to the central bank, opposing the imposition of higher provisions for under-construction projects, Reuters had reported last month.