Industry sources say CNBC-TV18 that changes are required in the 5% procurement norm proposed by the RBI as it constitutes a disincentive for both industry and government.
Banks said higher provisioning may mean higher financing costs for borrowers, which may lead to potential credit deterioration on some of the projects as higher interest burdens could impact borrowers’ cash flows.
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From the government’s perspective, the 5% provision could affect the flow of credit to infrastructure sectors, and banks would have to set aside more funds for regulatory capital rather than lending.
The sources said the method for dealing with a “credit event” – i.e. a default – might also need to be rethought. The RBI draft said that if the net present value of a project declines and creates a potential credit risk, this will be interpreted as a credit event and banks will have to get the project’s NPV “independently reassessed” every year. Sources said this would likely trigger an unnecessary loan restructuring.
The regulator has not suggested a sector-specific differentiation for banks to make higher provisions. Banks will have to comply with the 5% provisioning rule for all project financings, regardless of the sector-specific default risk, which could be lower for certain sectors, such as renewable energy, the sources added.
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The banking regulator is likely to announce the final guidelines soon, after considering comments from all stakeholders. However, provisioning norms for project finance are also expected to be incorporated into the Expected Credit Loss (ECL) framework, which the RBI is yet to formalise.
Sources say the regulator has also been advised that provisioning for expected credit losses be implemented in a deferred and phased manner for banks. Banks may need at least three years to adapt to an expected credit loss framework, while another three years may be required for actual implementation.
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