RBI Drafts Stricter Finance Rules for Projects Under Construction

In a significant move to enhance the stability of the banking sector, the Reserve Bank of India (RBI) has put forward a proposal to tighten the regulations surrounding lending to projects that are currently under implementation. This initiative, first announced in September 2023, aims to mitigate the financial stress on banks by introducing stricter provisioning norms for project loans.

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The draft rules, detailed on Friday, categorize projects based on their development phase and mandate higher provisioning during the construction phase. Historically, project loans have been a source of financial strain for banks, leading to a build-up of stress on their books. To address this, the RBI's proposed norms require banks to set aside 5 per cent of their exposure to a project during its construction phase, a significant increase from the standard asset provisioning of 0.40 per cent.

As a project progresses and becomes operational, the required provisioning can be reduced. Initially, it drops to 2.5 per cent of the funded outstanding amount and can further decrease to 1 per cent if specific conditions are met. These conditions include the project generating a positive net operating cash flow adequate for covering current repayment obligations to all lenders and a reduction of at least 20 per cent in the total long-term debt with lenders from the amount outstanding at the commencement of commercial operations.

The RBI's proposed guidelines also outline measures for stress resolution and specify criteria for upgrading accounts and recognition invocation. A key expectation from lenders is the maintenance of project-specific data in an electronic format that is easily accessible. Furthermore, any changes in the parameters of a project finance loan must be updated promptly, no later than 15 days following such change. Banks are expected to implement the necessary systems to comply with these directions within three months from their release.

The public has been invited to provide feedback on these proposals until June 15. This step by the RBI is seen as an effort to preemptively curb the accumulation of non-performing assets (NPAs) in the banking sector by ensuring that banks adopt a more cautious approach towards lending for projects that are yet to be completed.