Reserve Bank Proposes Tighter Rules For Project Lending, Introduces Higher Provisioning During Construction Phase

Reserve Bank Proposes Tighter Rules For Project Lending, Introduces Higher Provisioning During Construction Phase

Under the proposed norms, first announced in September 2023 and the details revealed on Friday, a bank has to set aside 5 per cent of the exposure during the construction phase, which goes down as the project becomes operational.

PTIUpdated: Friday, May 03, 2024, 08:50 PM IST
article-image
Reserve Bank Proposes Tighter Rules For Project Lending | Image: PTI (Representative)

The Reserve Bank on Friday proposed tighter rules to govern lending to projects under implementation.

The central bank's draft rules include a classification of the projects as per their phase and higher provisioning of up to 5 per cent during the construction phase, even if the asset is standard.

It can be noted that in the last credit cycle, project loans were seen to have led to a build-up of stress on bank books. The standard asset provisioning otherwise stands at 0.40 per cent.

Project finance rules

Under the proposed norms, first announced in September 2023 and the details revealed on Friday, a bank has to set aside 5 per cent of the exposure during the construction phase, which goes down as the project becomes operational.

Once the project reaches the 'Operational phase', the provisions can be reduced to 2.5 per cent of the funded outstanding and then further down to 1 per cent if certain conditions are met.

These include the project having a positive net operating cash flow that is sufficient to cover current repayment obligation to all lenders, and the total long-term debt of the project with the lenders has declined by at least 20 per cent from the outstanding at the time of achieving Date of Commencement of Commercial Operations, it said.

The proposed guidelines also spell out details on stress resolution, specify the criteria for upgrading accounts, and invoke recognition.

It expects lenders to maintain project-specific data in an electronic and easily accessible format.

Lenders will update any change in the parameters of a project finance loan at the earliest but not later than 15 days from such change. The necessary system in this regard will be put in place within 3 months of the release of these directions, it said.

The public has been given time till June 15 to respond to the proposals. 

RECENT STORIES

RBI Tightens Rules For Domestic Money Transfers: New Guidelines For Cash Transactions And KYC

RBI Tightens Rules For Domestic Money Transfers: New Guidelines For Cash Transactions And KYC

NEXA Celebrates 9 Years: Driving 31% of Maruti Suzuki's Sales in India

NEXA Celebrates 9 Years: Driving 31% of Maruti Suzuki's Sales in India

BMW CE 04 Electric Scooter Launched In India

BMW CE 04 Electric Scooter Launched In India

It's A Bug: Crowdstrike Blames Update For Letting Bad Data Slip Through Causing Global Tech Outage

It's A Bug: Crowdstrike Blames Update For Letting Bad Data Slip Through Causing Global Tech Outage

Concept Of Beauty: Cadillac's Sollei

Concept Of Beauty: Cadillac's Sollei