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Industry sources tell CNBC-TV18 that changes are required in the 5% provisioning norm proposed by the RBI as it is a disincentive for both the industry and the government.
Banks say higher provisioning may spell increased financing costs for borrowers, leading to possible credit impairment in some of the projects as a higher interest burden could affect borrower cash flows.
From the government’s perspective, the 5% provisioning could impact credit flow to infrastructure sectors, with banks having to set aside more funds for regulatory capital rather than lending.
Sources explained that the method to deal with a “credit event”, in other words, a default, may also need a rethink.
The RBI draft says if the net present value of a project comes down leading to a possible credit, this will be construed as a credit event and banks will need to get the project NPV “independently re-evaluated” every year.
Sources say this may trigger a loan restructuring which is not needed.
The regulator has not suggested a sector-wise differentiation for higher provisioning by banks. Banks will need to adhere to the 5% provisioning norm for all project finance, irrespective of the sector-specific default risk which could be lower for certain sectors, like renewable energy for instance, sources add.
The banking regulator is likely to announce the final guidelines soon, after having examined the feedback from all stakeholders. However, it is also expected that the project finance provisioning norms will feed into the Expected Credit Loss or ECL framework, which the RBI has yet to formalise.
Sources indicate for the ECL provisioning, too, suggestions have been made to the regulator seeking a deferred and staggered rollout for banks.
Banks may need at least three years to adjust to an ECL framework, while another three years may be required for actual implementation.
First Published: Feb 7, 2025 1:09 PM IST
