RBI’s New Project Finance Rules Aim To Shield Banks From High-Risk Exposure | Personal Finance News
New Delhi: The RBI’s new regulations on project financing are set to improve how risks are managed in this sector, as per a recent Crisil report. The move aims to create a stronger, more consistent framework by aligning regulations across banks and other financial institutions. These final directions are expected to bring much-needed clarity, reduce loopholes and ensure better monitoring of large-scale infrastructure and development projects. In the long run, this could boost investor confidence, promote responsible lending, and support more sustainable economic growth.
Crisil Ratings Director Subha Sri Narayanan highlighted that the final guidelines are more business-friendly than the draft released in May 2024. “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,” she said.
The new guidelines will apply only to future loans which means the impact on credit costs will likely be much lower than first expected. Another major relief for lenders is the removal of the earlier proposed six-month cap on the moratorium period after a project’s commercial launch. This change gives lenders more flexibility to structure repayments based on the project’s actual cash flow, making financing smoother and more practical.
According to the Crisil report, the new guidelines bring in key changes that will make risk management in project financing more effective and robust than the current regulations.
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. (With IANS Inputs)
