Updated May 3rd, 2024 at 19:42 IST

RBI tightens regulations on infrastructure loans amid banking sector concerns

The RBI said it issued draft guidelines "taking into account the experience of banks with regard to financing of project loans".

Reported by: Business Desk
RBI urges vigilance on infrastructure loan risks | Image:PTI
Advertisement

RBI's project vigilance: The Reserve Bank of India (RBI) has put forth new guidelines urging lenders to increase provisions for infrastructure projects under construction and to closely monitor any signs of financial strain. This move comes in light of past challenges faced by banks due to excessive lending to such projects, which strained the banking sector.

In response to the resurgence of infrastructure projects, primarily fuelled by government initiatives to stimulate the economy, the RBI has recommended that banks set aside 5 per cent of the loan amount during the construction phase. This provision can be reduced to 2.5 per cent once the project becomes operational, and further to 1 per cent when the project generates sufficient cash flow to cover repayment obligations.

Enhanced loan monitoring

Previously, project loans that were not in default or under stress required a provision of only 0.4 per cent, as outlined in a 2021 circular on the RBI's website. However, the central bank now emphasises the need for ongoing monitoring of project health and timely initiation of resolution plans.

Additionally, the RBI mandates that lenders forming consortia to finance projects valued up to $179.92 million must have a minimum exposure of 10 per cent. This threshold could be lowered to 5 per cent for larger projects.

Banks are also instructed to accurately forecast the commencement of commercial operations for projects and adjust provisions accordingly in case of delays. The RBI suggests reclassifying loans from standard to stressed if infrastructure projects face delays exceeding three years.

The RBI has invited feedback on these proposals until June 15 before finalising the regulations.

(With Reuters Inputs)

Advertisement

Published May 3rd, 2024 at 19:42 IST