'Better Safe Than Sorry': Here Is A Look Into RBI's New Guidelines For Banks & NBFCs

'Better Safe Than Sorry': Here Is A Look Into RBI's New Guidelines For Banks & NBFCs

The RBI has sent a chill down the spine of the infrastructure finance industry after reprimanding a number of entities for violations and non-compliance in the previous two years.

Vikrant DurgaleUpdated: Wednesday, May 08, 2024, 04:07 PM IST
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RBI |

The RBI has sent a chill down the spine of the infrastructure finance industry after reprimanding a number of entities for violations and non-compliance in the previous two years. This has caused the stocks of numerous PSU banks and important infrastructure NBFCs, including Power Finance Corp., REC, and the Indian Renewable Energy Development Agency (IREDA), to plummet.

Infrastructure's Default History

According to the RBI's December 2014 Fiscal Stability Report, infrastructure topped the list of industries, which included iron and steel, mining, textiles, and aviation, accounting for 52% of all scheduled banks' total stressed advances (NPAs and restructured loans).

Energy, gas, and oil made up about 58% of infrastructure, followed by transportation at 21% and telecommunications at 10%. Exuberant revenue projections and protracted project delays resulted in significant defaults, which turned lenders away from the infrastructure business. Meanwhile, Infrastructure Leasing & Financial Services (IL&FS) collapsed, leaving creditors with over Rs 1 lakh crore in debt.

New Guidelines

The RBI has now put forth new, stricter guidelines to control loans to projects that are currently being implemented. The primary draft rule from the central bank that has banks alarmed is the requirement for higher provisioning during the construction phase, up to 5% even for standard assets. An asset that shows no signs of trouble and doesn't involve any higher risk than usual for the company is considered standard.

The central bank plans to gradually raise standard asset provisioning from the current 0.4% of loans to 1-5% of loans. According to the new draft rule, a bank must set aside a significantly larger 5% of the loan exposure during the project's construction phase, and that percentage decreases as it becomes operational.

Additionally, the RBI suggested that the repayment tenor—original or modified—along with any applicable moratorium period not surpass 85% of the project's economic life.

The public has until June 15th to react to these and a few other recommendations included in the draft guidelines.

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