Lenders losing sleep over RBI’s new strictures
RBI) is expected to unleash stringent rules, tightening provisioning requirements for project finance, introducing a new expected credit loss (ECL) framework and imposing a higher liquidity coverage ratio (LCR) for deposits to hedge against sharp outflows through digital channels.
The central bank is expected to introduce these rules later this year and bankers are worried they will hurt profitability in the medium term.
“Banks have given their feedback on all three proposals; we can only hope RBI listens. The project finance norms, particularly, are pretty harsh. If implemented in its current form, it could hurt financing for the sector,” said an executive at a public sector bank. “At a time when India is looking to grow faster and there is no crisis on the horizon, these norms could do more harm than good.” The central bank published a set of draft guidelines in April on project finance.
In the draft guidelines, RBI asked all regulated entities to set aside 5% of their infrastructure loan amounts to cover against potential losses when a project is in the construction phase.
This buffer can be reduced to 2.5% when the project becomes operational, and further to 1% after it generates adequate cash flow to repay its existing obligations, and its long-term debt declines by at least 20% from the time of commencing commercial operations.
This substantially increases provisions from a flat 0.4% currently.
CREDIT LOSS
The new provisioning model proposed by RBI for expected credit loss says banks must recognise
