Lenders have turned circumspect on project finance after the Reserve Bank of India unveiled draft guidelines on prudential treatment of projects under implementation in May 2024, possibly fearing the provisioning impact it could have on their bottomlines.
This can be gauged from the fact that the total cost of projects sanctioned by banks and financial institutions in the first nine months of the current financial year is 29 per cent lower at ₹1.94 lakh crore, against ₹2.72 lakh crore in the year-ago period, per RBI data.
This decline comes in the backdrop of RBI issuing draft guidelines on ‘Prudential Framework for Income Recognition, Asset Classification and Provisioning (IRACP) pertaining to Advances – Projects Under Implementation, Directions, 2024’ in May 2024, whereby banks may be required to maintain provision on exposures to projects under implementation at various stages.
However, this could change going forward as RBI Governor Sanjay Malhotra, in his first post bi-monthly monetary policy press meet, recently stated that RBI will weigh all stakeholders’ interests before implementing the aforementioned directions.
RBI Guv’s assurance
The Governor noted that RBI has received stakeholder comments/ suggestions on the draft circular and it is examining them.
He emphasised that regulations will be framed in such a way that it balances the interests of the public, the depositors, and at the same time addresses the concerns of the banks, keeping in view the efficient use of resources.
Q3 project finance
As per the latest RBI monthly bulletin, project finance data collected from select banks and financial institutes (FIs) indicate that during Q3 (October-December) of 2024-25, total cost of projects sanctioned by banks and FIs at around ₹97,996 crore was marginally higher than ₹96,226 crore in the previous quarter.
About 70 per cent of intended investment was concentrated in ‘power’, ‘metals’ and ‘road and bridges’ industries.
Further, funds raised through ECBs (external commercial borrowings) and IPOs (initial public offers) for capex purposes stood at ₹35,893 crore during Q3 of 2024-25, as compared to ₹31,027 crore in the previous quarter.
Assessment of RBI’s draft circular
Care Ratings, in a report, cautioned that the sharp increase in provision for standard assets to 5 per cent (from 0.40 per cent) for all fresh and existing project loans in under construction will have a direct impact on the cost of debt. Consequently, this will dampen the bidding appetite from infrastructure developers in the medium term.
“Projects with cost overrun (due to a change of scope) of less than 25 per cent will face asset classification-related challenges and an increased financial burden on the project sponsor.
“Shifting the condition of minimum unencumbered land availability from the existing pre-disbursement condition to a pre-sanction stage will lead to an unwarranted delay in achieving financial closure,” the agency said.
Further, restricting the permissible timeline for cumulative deferment of DCCO (Date of Commencement of Commercial Operations) to 3 years from the earlier limit of 4 years, including reasons for litigation, is viewed as stringent.
Since the litigation cases require longer to resolve, this modification may result in the re-classification of such exposures (at the lender’s end) and a consequent step-up in borrowing costs during the implementation phase.
