NewKerala.com

Key Points

The RBI's finalized project finance guidelines offer relief to banks with reduced provisioning requirements compared to the draft. New consortium lending rules aim to improve risk assessment by ensuring higher stakeholder accountability. While stricter DCCO deferment timelines may challenge long-delayed projects, they enable earlier stress detection. Analysts say the changes balance risk management with operational flexibility for lenders.

Key Points: RBI Project Finance Rules to Ease Bank Risks Says Crisil Report

  • RBI norms cut provisioning needs for under-construction projects
  • Guidelines apply prospectively to soften credit cost impact
  • Tighter DCCO deferment rules enable early stress recognition
  • Consortium lending limits to improve due diligence efficiency
3 min read

RBI's new project finance directions to cushion banks against risk: Report

RBI's new project finance norms lower provisioning burden, ease business for lenders, and strengthen risk management, per Crisil analysis.

RBI's new project finance directions to cushion banks against risk: Report
"The final directions improve ease in doing business for lenders with significantly lower provisioning requirements – Subha Sri Narayanan, Crisil Ratings"

Mumbai, June 26

The Reserve Bank of India’s (RBI) final directions on project financing will help strengthen the guardrails against risk in project financing and harmonise the relevant and extant regulations across regulated entities, according to a Crisil report released on Thursday.

The final directions, released on June 19, come into effect from October 1.

Crisil Ratings Director Subha Sri Narayanan said: "Compared with the draft of May 2024, the final directions improve the ease in doing business for lenders. The provisioning requirements are significantly lower, not only in the case of under-construction projects but also for operational projects."

Additionally, the guidelines are applicable only on a prospective basis. As a result, the impact on credit costs would be well below what was envisaged earlier. The removal of the proposed six-month limit on the moratorium period after the date of commencement of commercial operations (DCCO) will also benefit lenders, allowing them to continue to structure loans in line with the expected cash flows of projects.

Further, there are some changes, compared with the extant regulations, which will bolster the overall risk management of project financing, according to the Crisil report.

The introduction of limits on the number of lenders and the individual exposure size for projects financed by a consortium would ensure each lender has a higher stake and hence is more proactive in due diligence, credit appraisal and risk underwriting during the loan tenure. Further, it will enable more efficient decision-making given the lower number of stakeholders and greater alignment of interests.

The new direction brings in a higher base level standard asset provisioning for under-construction projects set at 1 per cent and a slightly higher 1.25 per cent for under-construction CRE exposures (that compares with the extant 0.4 per cent to 1.0 per cent), with step-ups linked to DCCO deferment period.

This higher base level provisioning will bring in a differentiation between provisioning for under-construction and operational projects to address the inherently higher risk in the former. It also now guides lenders to step up their provisioning cushion aligned to the number of quarters for which the DCCO has been extended, in case the risk characteristics of a funded project change, the report states.

More stringent conditions on permitted cumulative DCCO deferment to maintain ‘Standard’ asset classification reduced to up to 3 years for infrastructure projects, irrespective of reason. For non-infrastructure projects, this has been retained at two years.

This could pose a challenge for lenders in cases of long-drawn litigation, but allows earlier recognition of stress and adoption of necessary steps to address the same, albeit with higher provisioning, the report added.

- IANS

Share this article:

Reader Comments

R
Rajesh K.
Good move by RBI to balance risk management with business needs. The reduced provisioning requirements show they listened to industry feedback. Infrastructure projects need this kind of pragmatic regulation to keep India's growth story going! 🇮🇳
P
Priya M.
As someone working in banking, these changes will make project financing smoother. The 3-year limit for infra projects is reasonable - we've seen too many projects stuck in limbo for years. Early stress recognition will help prevent bigger NPAs later.
A
Amit S.
While the intent is good, I worry about smaller lenders. The consortium limits might make it harder for regional banks to participate in big projects. RBI should monitor if this leads to concentration of power among a few large banks.
S
Sunita R.
Finally some clarity on CRE exposures! The real estate sector has been waiting for such guidelines. 1.25% provisioning for under-construction projects seems fair - better than the earlier draft. Hope this revives investor confidence in stalled projects.
V
Vikram J.
The DCCO deferment rules are much needed. Too many projects take the "chalta hai" approach to deadlines. Strict timelines will force better planning and execution. Infrastructure delays cost the economy dearly - this is a step in right direction.
N
Neha T.
As an investor, I appreciate RBI's balanced approach. The prospective application prevents shock to existing projects, while new safeguards protect our money. The step-up provisioning based on delays is brilliant - rewards timely completion! 👍

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

Leave a Comment

Minimum 50 characters 0/50