The Indian Banks’ Association (IBA) will ask the Reserve Bank of India (RBI) to keep provisioning for infrastructure project loans unchanged in its feedback to the latter’s recent proposal to raise the amount of capital lenders should set aside against such loans, three banking sources told Reuters on June 12.
Last month, the RBI proposed that banks and non-banking financial companies (NBFC) set aside a provision of 5% of the total loan amount of infrastructure projects at the construction phase, a sharp jump from the 0.4% required currently.
“The blanket 5% provisioning requirement will sharply increase the cost of implementing such projects and will hurt project financing,” one of the sources familiar with the matter said. “In case there is a delay in project completion, additional provisioning requirement should be brought in,” the source said.
Indian banks had seen large defaults across infrastructure loans from 2012-2013 on account of exuberant lending, straining the banking system. The country is now witnessing another spurt of government-led infrastructure projects as it tries to boost the economy.
Since asset quality issues are not very alarming at present, it may not be prudent to implement such harsh provisioning rules, two separate banking sources said.
The IBA met on June 11 to deliberate on feedback from individual banks and is expected to send a formal request before the June 15 deadline ends, the first source said.
The association did not immediately respond to a Reuters email seeking comment.
The Finance Industry Development Council (FIDC), which represents NBFCs, has formally opposed the RBI’s proposal, suggesting the provision be retained at the current level, Reuters reported on June 11. The IBA will also request the RBI to not implement these norms for loans that were extended prior to such guidelines, the first source said.
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