Indian Lenders to Oppose Tighter Rules on Infrastructure Loans Proposed by Central Bank

Indian lenders are preparing to challenge a recent proposal by the central bank aimed at tightening regulations on infrastructure project loans, according to banking industry sources.

The Indian Banks Association (IBA) is in the process of gathering feedback and will soon communicate its opposition to the Reserve Bank of India (RBI) regarding the proposed increase in provisions for under-construction projects, explained S.L. Jain, CEO of Indian Bank.

The RBI’s proposal, unveiled last Friday, suggests that banks should set aside a provision of 5% of the loan amount for projects in the construction phase. This percentage can later be reduced to 2.5% once the project becomes operational, and further reduced to 1% after achieving a certain level of cash flow.

A senior banker at an infrastructure finance institution expressed concerns that these increased provisions could lead to a rise of 1-1.5 percentage points in interest rates for project finance loans, particularly impacting sectors like renewable energy, which operate on thin profit margins.

The government is yet to finalize its stance on the regulations, but there are worries about potential unintended consequences such as reluctance among lenders to finance under-construction projects, explained a source familiar with the government’s perspective.

The IBA has until June 15 to provide feedback on the proposed rules, which could undergo revisions based on industry input.

The announcement of these regulatory changes resulted in a stock market sell-off of government-owned banks and non-bank lenders engaged in infrastructure and project finance, with analysts warning that increased provisions may hamper profitability and discourage lending in these critical sectors.

Overall, industry experts caution that if implemented as-is, the new rules could significantly impact the recovery of project finance and capital expenditure in the Indian economy.