NaBFID Chief Questions RBI's 5% Infra Loan Provision Proposal

Rajkiran Rai, the managing director of NabFID, questioned the Reserve Bank of India's (RBI) proposal for lenders to set aside 5 per cent for under-construction projects. He argued that the default rate on such loans is very low. Speaking at the annual Fibac event, Rai highlighted that the incidence of loans turning bad has decreased recently.

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Low Default Rates on Infra Loans

Rai pointed out that non-performing assets (NPAs) on infrastructure loans are less than 1 per cent. "Where is 5 per cent coming from? Actually it NPAs on infra loans is less than 1 per cent," he said. He acknowledged that over a ten-year period, the 5 per cent figure might seem accurate but stressed that the situation has improved significantly.

He noted that infrastructure loans are now available at rates as low as 8.75 per cent, according to a NaBFID study. This improvement is also reflected in the risk-based pricing for such finance by banks.

Bankers' Concerns and RBI's Response

A few weeks ago, the RBI issued draft guidelines reviewing project finance rules, suggesting banks should set aside 5 per cent as provisions for under-construction projects. Bankers have expressed concerns about this proposal, with some considering the number conservative.

Last week, a senior RBI official mentioned that the central bank is reviewing feedback and will issue final guidelines on project loans within 2-3 months.

NabFID's Data Collection Efforts

On Friday, Rai announced that NabFID has started collecting exact data on loan losses in infrastructure finance to better lobby with the regulator. However, he mentioned that this data collection might take over a year, potentially coming after the final guidelines are released.

Rai claimed that defaults on hybrid-annuity model (HAM) road projects and solar projects are currently zero. He recalled how bankers were hesitant to lend to HAM projects in 2015-16 but now there is significant competition among lenders for these projects.

Changing Perceptions on Infra Financing

Rai emphasised the need to change perceptions about infrastructure financing being risky. He reiterated that defaults are almost zero and noted that global private equity majors are investing in such projects. He questioned why there should be any obstacles given these positive developments.

In addition to low pricing by banks reflecting low risk, Rai highlighted that 60 per cent of incremental infrastructure lending is directed towards the roads sector. This indicates a strong interest and confidence in this area among lenders.

The ongoing discussions and data collection efforts aim to provide a clearer picture of the current state of infrastructure finance. This will help address concerns and shape future guidelines effectively.