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Informist, Thursday, Oct. 24, 2024

 

--Govt source: Want rethink on project financing draft norms, wrote to RBI

--Govt source: If implemented, draft norms to tighten infra financing

--Govt source: Project financing draft norms to up lenders' cost of funds

 

By Priyasmita Dutta and Sagar Sen

 

NEW DELHI – The finance ministry, which has been banking on infrastructure spending to revive the economy, views the Reserve Bank of India's draft guidelines on project financing as a potential spoke in the wheel. The ministry has written to the central bank suggesting a complete rethink on the draft norms which threaten to tighten funding for infrastructure projects, a senior official said. "We do not need them, it sucks out all the capital from the market," the official said.

 

On May 3, the RBI had proposed tighter guidelines on project financing by banks and non-banking finance companies to avoid large defaults on infrastructure loans. As per the draft norms proposed by the central bank, lenders would have to make provisions of up to 5% of the outstanding exposures during construction, as against 0.4% currently, which would be reduced to 2.5% once the asset turns operational.

 

According to the finance ministry official, the proposed norms will immediately push up the cost of funds for banks and NBFCs, which will in turn hurt their interest margins and hamper the availability of credit in the system. "Their project finance costs will go up, their borrowing costs will also go up," the official said.

 

Earlier in the year, Informist had learnt from top executives of many NBFCs that the draft norms, if implemented, will put pressure on their already small working capital and will add stress to their core fundamentals. At the heart of these concerns was the proposed increase in lenders' provisioning requirements.

 

A few NBFCs like REC Ltd. had earlier suggested that there was a case for the RBI to consider a lower provisioning requirement for government-backed entities, especially those involved in government spending. The finance ministry official, however, did not buy this argument as the government would prefer uniform treatment across lenders--public or private, bank or NBFC. "No, the treatment is the same, it should be uniform across the table," the official said.

 

The RBI's philosophy behind the tighter guidelines seems to be that the high risk associated with infrastructure projects must be recognised on the books of lenders. Infrastructure projects, by their nature, involve large capital outlays, significant gestation periods and involve many parties. They are, therefore, subject to multiple categories of risks — project-specific risks like delays and cost overruns, macroeconomic risks from financing availability or interest rate risk, and regulatory risks including cancellation or changes in rules and permits. These risks can arise even for government-funded projects.

 

As of March, 42% of the government's existing projects have reported delays, while 24% have experienced cost overruns, according to a report by the statistics ministry.  End

 

Edited by Ashish Shirke

 

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