Review of legacy infra loans underway at RBI 

The Reserve Bank of India is in the process of reviewing the status of loans lent to the infrastructure sector between 2010 and 2015. A specified format has been issued by the central bank wherein banks with exposure to infra loans have been asked to furnish borrower-wise data on the loan. High importance is being ascribed to the total loan amount sanctioned, terms of sanction, project details, deviations or exceptions from the sanction terms and why they had to be done.

It is also being seen if project milestones are being met according to the terms of the loan and whether the cash flows generated are in-sync with the projections at the time of sanction. 

In case exceptions or deviations are made from the sanction terms, the RBI is questioning banks whether the account has now been normalised. A failure to do will result in banks making a provisioning against such loans, even if they are standard according to RBI’s income recognition and asset classification (IRAC) norms. Same is the case with borrowers generating lower than expected cash flows. 

The impact of this exercise will be reflected in the upcoming March quarter results of banks. 

The central bank has not specified the provisioning cost and it is left to the discretion of banks, though banks are assuming a provisioning rate of 5–10 per cent.

Precautionary measure

“Over time, even if these loans may remain standard, the account would have been fully provided for,” said a banker who didn’t want to be named. According to bankers, the RBI has taken on this exercise more as a precaution to ensure that legacy infrastructure loans don’t pose a challenge at a later point in time. In short, this is a clean-up attempt by the regulator to ensure that the balance sheets of banks are indeed ready to take on further exposure to the infrastructure sector as the economy opens. 

Between 2010–2015, banks had lent about ₹ 4,83,307 crore to the infrastructure sector according to RBI’s sectoral deployment data and nearly 80 per cent of these loans have already been written off by banks. The infrastructure sector is mainly comprised of power, telecom and road projects, where resolution through the bankruptcy process hasn’t yielded results. 

Banking system’s gross NPA was ₹4,53,145 crore as on September 30, 2021. With about ₹1 lakh crore of infrastructure loans under the lens, RBI’s objective is to ensure that the bulge of bad loans doesn’t undergo a sudden spike by 25 per cent in the near-term.   

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