State-Owned Banks Seek Government Support for Infrastructure Projects Amid New RBI Rules

State-owned banks plan to ask the government for changes to the rules on performance bank guarantees (PBGs), timely compensation from concessioning authorities, and more protection for board members who approve funds for infrastructure projects. This move comes as they respond to new Reserve Bank of India (RBI) draft rules on project financing, which call for higher financial reserves.

“If banks have to continue supporting the infrastructure sector, then these issues need to be resolved,” said a senior executive from a public sector bank (PSB).

Last week, PSBs discussed these concerns and decided to approach the finance ministry. Lenders want a unified set of rules for invoking PBGs, which are issued based on the progress of a contract. They believe that concessioning authorities often invoke these for minor issues in infrastructure projects, creating extra burdens for banks. This problem is worsened by legal disputes, delaying projects further.

Bankers also want clear timelines for compensation decisions when projects are delayed due to issues like land acquisition, which are beyond the control of the project developer.

Experts say that resolving these operational issues is crucial for the success of the government’s infrastructure plans. “Helping resolve the issues that financial institutions face will ensure smooth progress for the country’s infrastructure development,” said Vivek Iyer, a partner at Grant Thornton Bharat.

According to an impact analysis by CareEdge Ratings, the RBI’s draft rules require specific credit event definitions and timely resolution plans, which will need increased monitoring from all stakeholders.

Banks argue that comprehensive rules are needed to prevent all liability from falling on them. They also seek greater protection for board members, similar to the exemptions given to top executives at the National Bank for Financing Infrastructure and Development (NaBFID).

Under the new RBI guidelines proposed on May 3, lenders will need to set aside up to 5% of outstanding exposure as provisions during the construction phase of projects, compared to the current 0.4%. This will reduce to 2.5% once the project is operational.