RBI proposes higher provisions for project finance

Mumbai: The Reserve Bank of India (RBI) on Friday raised the provisions for under construction infrastructure projects and asked lenders to monitor any build-up of stress in a project on an ongoing basis and initiate a resolution plan well in advance.

All lenders will have to maintain a general provision of 5 per cent of the loan outstanding on all existing as well as fresh loans when the project is in the construction phase. Once the project reaches the ‘Operational phase’, the provision can be reduced to 2.5 per cent provided that the project has started generating cash sufficient to cover the lenders' repayment requirements said the RBI in its draft Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to advances-Projects under Implementation.

Project loans that were not overdue or stressed so far attracted a provision of 0.4 per cent as per a 2021 circular available on the RBI's website.

Lenders desirous to have project finance exposures shall have a Board-approved policy for resolution of stress in the projects on occurrence of a credit event. For any project, all mandatory pre-requisites should be in place before financial closure. An indicative list of such pre-requisites includes availability of encumbrance free land and/or right of way, environmental clearance, legal clearance, regulatory clearances, etc., as applicable for the project. However, for infrastructure projects under the PPP model, land availability to the extent of 50 per cent or more can be considered sufficient by lenders to achieve financial closure, said the central bank.

Occurrence of a default during the construction phase, with any of the lenders in the project finance arrangement, within or outside the consortium, shall trigger a collective resolution, said the RBI.

The regulator also said lenders coming together in a consortium to finance projects worth up to Rs 1500 crore must have an exposure of at least 10 per cent. The floor could be set at 5 per cent for larger projects. It asked banks to have clear visibility on the date on which a project is expected to begin commercial operations and increase provisions in case operations are delayed.