Banks seek flexible NPA norms for infra loans

Current rules are not viable, lenders tell finance minister.

Banks have urged the government to ask the Reserve Bank of India (RBI) to outline flexible norms for recognising defaults on lending to infrastructure projects, given the delays in project implementation, owing to factors beyond the promoter's control.

Current regulations require banks to classify a loan for financing an infrastructure project as a non-performing asset (NPA) if the project has not begun operation one year after the date on which the project was originally expected to be completed.

Public sector banks told Finance Minister P Chidambaram that infrastructure projects could get held up due to factors such as delay in obtaining statutory and regulatory clearances, land acquisition and ongoing litigation, which were beyond the promoter's control.

In future, classifying these loans as NPAs would lead to a problem for banks, the chairmen of public sector banks said in a meeting with the finance minister on January 4 for the half-yearly review of banks' performance.

The representation assumes significance as investments required for development of infrastructure in the country over the next five years are estimated to be over $500 billion.

"While the project may be held up due to factors beyond the promoter's control, the promoter raises resources and services the interest due. Even if the interest dues are being serviced, the project is classified as an NPA. This will create a problem in the coming years," said a banking executive present at the meeting.

In April 2007, RBI had altered the infrastructure lending norms to allow banks to classify a loan as a bad one if the date of commencement of commercial production extended beyond a period of one year, instead of the six months mandated earlier, after the expected date of completion of the project. RBI regulations require the date of completion of the project to be clearly spelt out at the time of financial closure of the project.

"At times, even with the best of intentions, projects get delayed beyond one year due to factors such as clearances. To meet RBI norms, banks have to make provisions even despite the fact that the client may be making interest payments. Such norms affect (reduce) the ability to take exposure to infrastructure projects. Given the high demand for funding infrastructure projects, more flexibility should be given to banks on any modification in change of commencement date," said K C Chakraborty, CMD, Punjab National Bank, and chairman of the Confederation of Indian Industry (CII) banking sector panel.

RBI, while modifying NPA norms, had noted that, "Infrastructure projects require heavy fund outlays with long gestation periods due to many inherent factors such as statutory or regulatory clearances, land acquisition, resettlement or rehabilitation of the displaced people. All these factors, which are beyond the control of promoters, may lead to a delay in project implementation and involve restructuring or reschedulement by banks."