India’s Growth Engine Gets A Push As RBI Relaxes Loan Rules for Big Infrastructure Projects

The Reserve Bank of India (RBI) on Thursday said that it would require lenders to set aside 1% of the value of loans for under-construction infrastructure projects to cover its potential losses.

Through this move the central bank has made an attempt to ease its earlier draft proposal that envisaged provisioning rising up to 5%, following an appeal by lenders, a Reuters report said.

This requirement will come into effect starting October 1.

Why Is The Central bank Doing This?

There have been long delays in implementing projects and optimistic revenue projections have led to large loan defaults in India and made lenders wary of the infrastructure sector.

Additionally, the central bank had proposed in May last year that lenders should set aside 5% of the loan value for an infrastructure project which is being bult to cover risks. But according to lenders, this could dampen a recovery in project finance.

Further, the RBI Governor, Sanjay Malhotra has taken several steps to ease credit requirements to try to stimulate growth.

RBI has partially reversed tighter rules for bank loans to small borrowers and non-bank lenders since January, and has also eased rules for small-ticket gold loans, and begun unwinding curbs on non-bank financial companies and banks.

What Would Lenders Have To Do?

As part of the new rules, lenders would also have to set aside 1.25% of the value of loans for under-construction commercial real estate projects.

These rules limit extensions to project completion deadlines or the date of starting commercial operations, to three years for infrastructure projects as well as two years for non-infrastructure projects, the report added.

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