The Reserve Bank of India’s (RBI) draft proposal mandating lenders to reserve 5% initially for infrastructure projects has ignited concerns among public sector banks and non-banking financial companies (NBFCs), prompting proactive risk mitigation strategies amidst fears of escalating non-performing assets (NPAs).
In response to the regulatory directive, several lenders, including Canara Bank, Union Bank of India, and Bank of India, are contemplating measures to hedge against potential risks. Canara Bank has already taken a proactive stance by incorporating a clause in fresh loan sanctions, empowering the lender to pass on any additional costs incurred due to regulatory requirements. A Canara Bank official stated, “Any extra cost arising out of regulatory requirement can be passed on,” underscoring the institution’s commitment to managing risk effectively. With a project finance portfolio exceeding Rs 1.10 trillion, Canara Bank’s proactive approach reflects the sector’s proactive stance in mitigating potential NPA risks.
Similarly, Union Bank of India is exploring the introduction of specific clauses for project financing to safeguard against cost escalations arising from RBI regulations. The final adjustment in interest rates for project finance loans will be contingent upon the issuance of the final RBI norms, indicating a cautious yet proactive approach to risk management.
The RBI’s draft guidelines, unveiled on May 3, stipulate that lenders must maintain a 5% provision for loans extended to under-construction projects, gradually phased until FY27. Upon project operationalization, provisions can be reduced to 2.5% of funded loans, further diminishing to 1% provided certain operational viability metrics are met. As banking institutions gear up to navigate the evolving regulatory landscape, the focus on risk management and NPA mitigation assumes paramount importance. With infrastructure project delays posing a significant threat to asset quality, proactive measures such as hedging against additional costs and aligning with regulatory directives underscore the sector’s commitment to ensuring financial stability and resilience amidst challenging times.
