RBIs draft lending norms – how big will the impact be on infra projects?

Author: Aditya Jain

What?

On May 3rd, 2024 RBI released ‘stricter’ draft norms for banks, NBFCs and FIs lending to under-construction projects

Provisioning requirements proposed to be increased from 0.4% to 5% during construction phase for standard assets

O&M phase provisioning set to increase from 0.4% to 2.5%; may reduce to 1% if project achieves sufficient cashflow to repay

Moratorium on repayments post Date of Commencement of Commercial Operations (DCCO) capped at 6 months as against ‘at discretion’ before
Earlier, deferral of DCCO beyond 4 years led to standard asset becoming ‘restructured standard’(if meeting cost overrun) or substandard/NPA (if not) triggering substantial provisioning requirements; threshold now revised to 3 years

Bottom Line

Stakeholders’ reaction to the draft norms not welcoming; FinMin to discuss issues with industry representatives

RBI wants to clip ‘irrational exuberance’ towards developmental assets given recent time and cost overruns in infra projects – allaying chances of a repeat of the 2018-20 NPA crisis

Increased provisioning and cap on moratorium likely to impact borrowing costs; lenders may feel disenchanted from infra developmental assets – the flagbearer of India’s growth story

Restrictions on moratorium likely to impact IRRs given the high cashflow driven nature of the sector; could lead to higher equity contribution from sponsors

No grandfathering for existing loans – costs to be passed on to borrowers; industry says impact could be north of 100 bps

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