Tightening the Reins: RBI's New Lending Guidelines Shakes PSU Banks
The Reserve Bank of India (RBI) has unveiled stringent draft guidelines aimed at fortifying the regulatory framework governing project finance across sectors. This move has triggered tremors in the banking landscape, with public sector undertaking (PSU) banks bearing the brunt as their stocks plummeted. The proposed norms have sparked concerns about potential obstacles to infrastructure growth and escalating credit costs, prompting lenders to lobby for revisions.
Rationale Behind the RBI's Proactive Stance
India's financial system has undergone a remarkable transformation, emerging from the depths of a corporate debt crisis nearly a decade ago. However, the central bank remains vigilant, mindful of the risks that can silently accrue over extended periods. The recent real estate meltdown in China's mammoth banking sector has underscored the urgency for pre-emptive measures to safeguard the nation's financial stability.
The Crux of the New Guidelines
At the core of the RBI's draft circular lies the mandate for higher provisioning requirements during the construction phase of projects. Lenders would be obligated to set aside up to 5% of their outstanding exposures as provisions, a significant escalation from the current 0.4% norm. This stipulation has sent shockwaves through the banking community, particularly among PSU entities.
Phased Implementation and Operational Adjustments
To mitigate the immediate impact, the RBI has proposed a phased approach to the provisioning hike. The requirement would incrementally increase from 2% by March 31, 2025, to 3.5% by March 31, 2026, ultimately reaching the 5% threshold by March 31, 2027. Once projects transition to the operational phase, the provisioning can be reduced to 2.5% of the outstanding amount and further lowered to 1% upon meeting specific criteria, including positive net operating cash flow and a 20% decline in long-term debt from the commencement date.
Consortium Lending and Exposure Thresholds
The draft guidelines also introduce minimum exposure thresholds for consortium lending arrangements. For projects with an aggregate exposure of up to ₹1,500 crore, no individual lender can have an exposure below 10%. If the aggregate exceeds ₹1,500 crore, the individual exposure floor rises to 5% or ₹150 crore, whichever is higher. This provision aims to prevent smaller players from diluting their stakes excessively.
Classifying Delayed Projects as Non-Performing Assets (NPAs)
Under the proposed norms, lenders would be compelled to classify loans as non-performing assets (NPAs) if the project is delayed beyond six months from the original stipulated deadline or the commencement of commercial operations date. This measure seeks to address the longstanding practice of classifying delayed loans as standard assets, even after years of inactivity and lack of cash flow generation.
Stress Resolution and Data Maintenance
The guidelines outline specific criteria for stress resolution and account upgradation, invoking recognition of diminished asset values. Lenders are mandated to maintain project-specific data in an electronic and easily accessible format, updating any changes in loan parameters promptly, but within 15 days of such modifications.
Potential Ramifications and Industry Apprehensions
While the RBI's intentions are rooted in prudence and risk mitigation, the proposed guidelines have ignited concerns within the banking sector. The projected net worth impact ranged from 0.4% to 0.8% for larger private banks and a more substantial 1.5% to 3% hit for PSU banks, exerting downward pressure on their valuation multiples.
Lenders may be compelled to transfer a portion of the heightened costs to borrowers, potentially leading to a 1% to 1.5% increase in interest rates for project finance loans. This could impede growth in capital-intensive sectors like renewable energy, which operate on slim margins, and derail the nation's hard-earned capital expenditure momentum.
Industry Lobbying and Counterarguments
Recognizing the potential implications, banks are gearing up to lobby the central bank, arguing that the sharp increase in provisions could stall India's economic progress as the fastest-growing major economy amidst global uncertainties. They contend that applying higher provisions to ongoing projects could undermine their viability, escalate costs, and potentially trigger delays and stressed loans.
Striking the Right Balance: A Delicate Equilibrium
As the public consultation period draws to a close on June 15, the RBI finds itself at a crossroads. It must carefully weigh the merits of its proposals against the industry's apprehensions, striving to strike a delicate equilibrium between risk mitigation and economic growth facilitation.
The ultimate outcome will shape the trajectory of India's infrastructure landscape and determine the nation's ability to maintain its coveted status as an investment haven amidst global uncertainties. The financial sector eagerly awaits the final guidelines, hopeful that the central bank will navigate this intricate challenge with prudence and foresight.
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