RBI’s proposal is assessinated by the government:
The government is scrutinizing draft rules from the RBI, which propose higher provisioning for infrastructure projects. Meanwhile, lenders are expected to oppose these rules across various platforms. Officials have expressed concerns that these regulations might result in increased interest rates and disrupt the momentum of capital expenditure. Individuals familiar with the matter stated that after the evaluation process, the draft rules will be deliberated with the banking regulator during consultations.
The release of these proposals by the RBI caused a decline in the shares of state-owned banks, non-banking finance companies (NBFCs), and infrastructure firms the previous day. Investors are apprehensive that if implemented, these norms could adversely impact financial performance.
“These are draft guidelines, and the consultation process is on. All stakeholders will try to find a common ground to manage risks while supporting infrastructure financing,” said a finance ministry official, adding that if banks and other ministries flag any concerns, these will be shared with RBI. The regulator has sought comments on its proposed guidelines by June 15.
Banks are gearing up to contest the Reserve Bank of India’s proposed surge in provisions, fearing it could disrupt India’s status as the fastest-growing major economy amid global uncertainties. They plan to voice their opposition through the Indian Banks’ Association (IBA) and directly to the regulator. State-owned power sector NBFCs like REC and Power Finance Corp will also communicate their concerns, with the Department of Financial Services ready to highlight any issues raised by state-owned lenders.
Concerns arise about the substantial increase in provisions, particularly as there seems to be a lack of visible risks in project finance. The proposed guidelines suggest setting aside up to 5% of outstanding exposure during the construction phase, a significant leap from the current 0.4%. Although provisions will decrease to 2.5% when the project is operational and further to 1% after achieving sufficient cash flow, these changes will be phased in gradually over the next few years.
Stocks of key infrastructure NBFCs experienced a downturn for the second consecutive day, contributing to a significant decline in stakeholder value in the public sector. The new norms apply across all infrastructure projects, raising concerns about viability and potential stress on the banking system.
While the proposed guidelines are being scrutinized by various stakeholders, including state-run infrastructure financing firms and the road ministry, concerns persist about their potential impact on interest rates, cash flow, and capital adequacy ratios. Executives from infrastructure-focused NBFCs like REC and PFC anticipate a notable impact on capital ratios due to stringent provisioning requirements.
Despite differing opinions on the impact of the proposed guidelines, experts agree that banks will likely exercise greater caution in project finance, aligning with the RBI’s recent regulatory tightening efforts. The regulator aims to insulate banks and NBFCs from the risks associated with project finance, a sector that has contributed significantly to NPAs in previous cycles.
