RBI guidelines are clear about income recognition, asset classification and provisioning pertaining to advances

The nature of the risks and challenges in construction space of such infrastructure projects calls for greater risk coverage as the same provisions will come in handy when in difficulties in the future

The draft guidelines issued by the Reserve Bank of India (RBI) in May for income recognition, asset classification and provisioning (IRACP) pertaining to advances under project implementation are pertinent from the point of delay in completion of the projects due to various reasons. They seek the permitted extension of the earlier agreed date of commercial commencement of the project, which will not lead to the advances being classified as NPA and can be treated as standard advances.

However these directions have been a matter of concern for regulated entities (REs) as the as against normal provisions towards standard assets of at least 0.40 per cent of the funded outstanding on a portfolio basis for all advanced except those to the commercial real estate sector, provisioning requirement is 0.75 per cent, provisioning for standard assets to projects under implementation at various stages.

Both Central and state governments have been focussing on Capex, particularly in infrastructure projects like roads, railways, ports, thermal and renewable power projects, airports, telecom and environment related projects.

It is also pertinent to note that bank funding of such infrastructure projects have gained higher share of industrial credit. In March 2015, which was 15 per cent of industry credit, has moved to 37.5 per cent at the end of March 2023. The outstanding credit to infrastructure projects stood at Rs. 12,80,258 crore in March 2024.

Many other projects require special skills to appraise, monitor and ensure completion and as well ensuing the estimated cash flows from the projects implemented in order to ensure that they are properly serviced and not heading stressed projects or non-performing advances. The probability of defaults is greater in view of the complexity of the project and it is very difficult to properly plan, implement and make it successful.

Considering these difficulties, the central bank has provided for extension of DCCO. RB has classified these risks as either endogenous risks, risks which are endogenous to the specific project, mainly due to deficiencies in planning and execution capabilities of the project sponsor or concessionaire which may lead to cost overruns, time overruns and even change in ownership.

These risks can also due to exogenous risks- risks which are exogenous to a specific project and which may adversely impact some or most of the entities in the economy or in a specific sector or in a specific geographic region. The current climate change and its adverse impact in some of the vulnerable geographic regions, natural calamities, any pandemic change in government policy and regulation will also lead to both cost and time overruns.

Accordingly RBI has provided for allowable deferment of DCCO by one year, including commercial real estate projects for exogenous risks- and up to 2 years for infrastructure projects, up to one year for non-infrastructure projects (excluding CRE projects) in respect of endogenous risks and up to one year (including CRE projects) for litigations like court cases.

Currently banks are in a comfortable position as to their provision coverage, as gross NPA and net NPA are lowest. The profit and profitability of the banks are much better. Hence, RBI thought it fit for enhanced provisioning requirement for projects under implementation as it is ideal to factor the risks both in pricing as well as in making provision for standard such advances at elevated levels even though it may feel a bit tougher and can have a marginal impact on profits. The nature of the risks and challenges in construction space of such infrastructure projects calls for greater risk coverage as the same provisions will come in handy when in difficulties in the future.

According to Care edge, for public sector banks, the impact of incremental provisioning would be up to 20 bps whereas for private sector banks incremental provisioning would be up to 1O bps for each of the years of F25 to F 27. The RBI has provided for phased implementation of these directions. The current environment with better GDP growth of India and with sound macro-economic fundamentals, and banks having strong financial strength, with better risk management and credit monitoring will ensure quality on assets in general and infrastructure and non-infrastructure projects in particular. These provisions will also lead to reasonable strengthening of the balance sheet of these lenders. The higher provisions will get reversed once the projects get completed and generate cash flows as originally envisaged.

The RBI has prescribed minimum share per participant bank in the overall lending. According to it, no individual lender shall have less than 10 per cent of the aggregate exposure, in case projects financed under consortium arrangements, where aggregate exposure is up to Rs. 1,500 crore. Further, the individual exposure floor shall be five per cent or Rs. 150 crore, whichever is higher, in case of projects where the aggregate exposure of lenders is more than Rs. 1,500 crore. This stipulation is also relevant as these projects are for larger advances and the bank has to have a minimum exposure so as to restrict the number of banks in the consortium as well as banks with higher financial strength with proven expertise in financing such infrastructure projects or non-infrastructure projects should only take share. Asset liability management in these long duration term loans are very important and banks have to take a note of such long term resources.

The Union Government set up NaBFID in April 2021, as India’s All India Financial Institution to support development of long term non-recourse infrastructure financing in India . NaBFID with better expertise and long term funds will be in better position to underwrite big infrastructure projects. The Union Finance Minister Nirmala Sitharaman has acknowledged that NaBFID is working well and it is the ideal route for funding infrastructure and enabling development finance.

Banks have reportedly made a representation to the RBI and the Centre as to the modifications required in terms of elevated provisions towards standard advances to infrastructure and non-infrastructure projects. The RBI is expected to respond after finalising all directions.

(The author is former Chairman & Managing Director of Indian Overseas Bank)