Banks urge RBI to separate pvt, public infra projects in financing norms

Banks are dissatisfied with this arrangement and prefer a graded approach with an initial allocation requirement of 1-2 per cent, which is an increase from the current requirement of 0.4 per cent

Commercial banks have urged the Reserve Bank of India (RBI) to differentiate between private and public sector projects, citing the latter’s implicit sovereign support that addresses any cost overruns.

In response to the RBI’s draft infrastructure financing guidelines, banks have also recommended that the guidelines be implemented only prospectively, according to four officials confirmed to Business Standard.

The deadline to submit suggestions to the RBI was June 15, 2024.

“The public sector projects have implicit sovereign support. Therefore, if there is a cost overrun, it will be funded by the government. In contrast, in a private project without sufficient equity or support, the risk of the project failing is higher. This distinction is not currently reflected in the draft guidelines,” said the first official.

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Emails sent to the Ministry of Finance and RBI remained unanswered at the time of going to press.

A second official added that the moratorium period varies for each project.

“The RBI drafts propose a uniform moratorium of six months. However, this may not be practical as different projects could require varying moratoria or payment timelines,” the official explained.

On May 3, 2024, the RBI released draft regulatory guidelines applicable to all commercial banks, non-banking financial institutions, urban co-operative banks, and other financial institutions engaged in project finance lending.

The guidelines specify that lenders should allocate 5 per cent of their funded amount during the construction phase of an infrastructure project. Once the project enters its operational phase and starts generating cash flows, this allocation can be reduced to 2.5 per cent. A further reduction of 1 per cent is possible if the project’s cash flows cover all repayment obligations and its long-term debt is decreasing.

Banks are dissatisfied with this arrangement and prefer a graded approach, suggesting an initial allocation requirement of 1-2 per cent, which is an increase from the current requirement of 0.4 per cent.

“What we are proposing is 1 per cent provisioning during construction, with a potential increase to 2 per cent in case of delays, depending on the nature of the delay,” explained the third official.