The Department of Economic Affairs (DEA) in the Finance Ministry will soon take feedback of the concerns of banks and other infrastructure lenders on the draft project finance guidelines issued by the Reserve Bank of India (RBI). 

Post this consultation exercise, senior DEA officials are likely to meet RBI at Mumbai to convey the government’s thinking on the same, sources said. RBI had fixed June 15 as the last date by when stakeholder comments would have to be submitted for the draft guidelines. 

The DEA — which is the main department in the Finance Ministry overseeing infrastructure development—is likely to early this week obtain feedback on the draft RBI guidelines from bank representatives, it is learnt. The RBI is not asking banks to increase the provisioning from the current 0.4 per cent to 5 per cent at one go. The provisioning has to increase gradually by 1.5 per cent every year, to reach 5 per cent by March 2027. 

Plea to govt

Already some infrastructure lenders have represented to the government that the proposal requiring a general provision of 5 per cent of the outstanding loans in all existing as well as fresh project loans needed a rethink. They have understood to have urged the government that the additional provision should not be insisted upon in the final guidelines.

Banks are apprehensive that the higher provisioning for infrastructure projects recommended by the RBI would increase project costs, may turn several projects unviable and have ripple effects on other sectors. For instance, road cess may be increased to account for the higher finance costs in road projects due to higher provisioning which will directly and indirectly affect other sectors as users would now have to pay increased road cess.

Call for discretion

Some suggest that good projects that meet all timelines and other parameters including costs should not be painted with the same brush as the not so promising ones. “The projects that are performing well should not be made to do higher provisioning because the government is worried about the not so promising ones. Discretion should be used based on performance,” a source said.

RBI’s proposal of higher provisioning is being seen as a pre-emptive action — a sort of counter cyclical buffer—to prevent risks from building-up in bank balance sheets.

Asked if additional provisioning required by RBI draft guidelines would (if implemented) affect the profits of the bank this year, Atul Kumar Goel, Managing Director & CEO of Punjab National Bank (PNB) replied in the negative. “No, I don’t think so. It is a draft guideline from the regulator. We will have to wait for the final guidelines and not come to conclusion before that. I do not foresee any challenge. I can assure to everybody whatever will be the final guidelines, PNB will be in a position to easily provide whatever the requirement”, Goel told businessline here. PNB infrastructure book is estimated to be close to ₹1-lakh crore.

Goel said that the RBI’s draft guidelines are well intended and would bring discipline in the field of project finance besides ensuring timely completion of the projects. “I think this is the view of the regulator (RBI) and they are right also. Now question that is debatable is what should be the percentage of the provision. That is debatable. That we will discuss in the Indian Banks Association (IBA) and we will submit our comment to the regulator for which the date is on June 15,” Goel added.

The RBI draft guidelines on project financing — issued earlier this month— may have been prompted by past lending mishaps notably arising from credit extended during 2004-08. Post the global financial crisis in 2008 and cancellation of 2G telecom licences and some coal mining licences by Supreme Court, several infrastructure projects came to a halt, leading to impairment of bank balance sheets.