Indian lenders plan to appeal the RBI's stringent proposal on project finance.

Summary:

Indian lenders are prepared to challenge a central bank proposal aimed at tightening regulations for infrastructure project loans. The Indian Banks Association (IBA) is in the process of collecting feedback and intends to formally communicate its opposition to the Reserve Bank of India (RBI). The main point of contention is the proposed increase in provisions for under-construction projects. The RBI's suggestion entails banks setting aside 5% of the loan amount for projects during the construction phase, with the possibility of reduction to 2.5% once the project is operational and further down to 1% upon reaching a specified milestone.

According to a banker and a source familiar with the matter, Indian lenders are poised to challenge a central bank proposal aimed at tightening regulations for infrastructure project loans.

They stated that the Indian Banks Association (IBA) is collecting feedback and intends to communicate its opposition to the central bank's imposition of increased provisions for under-construction projects.

S.L. Jain, the chief executive officer of the government-owned Indian Bank, remarked that the provisioning requirement appears to be on the higher side. Jain mentioned that this concern will be deliberated with the Indian Banks Association (IBA), followed by a formal request to the RBI.

On Friday, the central bank proposed that banks allocate a provision of 5% of the loan amount for projects in the construction phase. This could potentially decrease to 2.5% upon project operationalization, and further to 1% after achieving a certain level of cash flow.

According to a senior banker at an infrastructure finance institution, this adjustment might result in a 1-1.5 percentage point rise in interest rates for project finance loans.

The source confirmed that sectors like renewable energy, which operate on narrow margins, would be most severely impacted by an increase in interest rates. It was affirmed that lenders will actively pursue a reduction in the levy.

A third individual familiar with the government's stance highlighted that while the government has yet to finalize its position on the regulations, it must take into account unintended consequences such as a potential reluctance among lenders to finance under-construction projects.

The proposed rules are subject to potential alterations based on feedback received until June 15.

The IBA did not respond immediately to a request for comment.

Beginning in 2012-13, Indian lenders experienced a surge in non-performing loans, largely stemming from numerous infrastructure-related borrowings that soured following the global financial crisis in 2008.

Extensive delays in project implementation and overly optimistic revenue forecasts resulted in substantial defaults, causing lenders to become wary of the infrastructure sector.

According to a source, a majority of infrastructure projects are currently propelled by the government or government-owned entities, implying a low default risk.

The central bank's proposal triggered a sell-off in the share prices of government-owned banks and non-bank lenders specializing in infrastructure and project finance. Analysts suggested that the increased provisions would diminish profitability on project loans and discourage such lending.

Macquarie stated in a research note on Tuesday that if implemented in their current form, these rules could markedly dampen the recovery in project finance and capital expenditure within the economy.

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Source - https://economictimes.indiatimes.com/industry/banking/finance/indian-lenders-to-appeal-rbis-tough-project-finance-proposal-sources-say/articleshow/109925765.cms

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