RBI's change in project finance rules may sow the seeds of a future crisis

Given that the project does not generate any revenue at this stage, loan repayment generally starts after the construction is over and the project has begun operations

The Reserve Bank of India’s (RBI’s) recent project financing guidelines have led to much cheer in the stock markets. One highlight is that the provisioning requirement on project finance is now 1 per cent, instead of 5 per cent proposed in the discussion paper issued earlier. Many lenders feared that a blanket requirement of 5 per cent, provisioning would absorb all capital and slow down lending. Thus, the RBI has avoided a short-term slowdown in economic activity. However, are these guidelines net positive from a long-term point of view, or are some tweaks necessary, given our experience of the Indian