Mint Primer | Infra financing guidelines: Why are banks upset?

livemint.com:

Mint explains why. Banks faced a non-performing asset (NPA) crisis between 2009 and 2012 due to excessive lending to infrastructure firms, prompting the Reserve Bank of India to frame guidelines on resolving stressed assets. Its first circular in 2019 laid down the framework for banks.

But it did not cover resolution of loans given to projects under implementation due to change in the ‘date of commencement of commercial operations’, or DCCO. The new draft guidelines released on Friday provide a framework for financing of projects in infra, non-infra, and commercial real estate sectors by banks, non-banks and cooperative banks. First, RBI has proposed an increase in standard asset provisioning to 1-5% of loans from the current 0.4% in a phased manner.

Second, individual lenders who are part of a consortium, should take at least 10% exposure in infrastructure projects worth ₹1,500 crore, and 5% or ₹150 crore, whichever is higher, in projects worth more. Third, banks can call moratorium on repayment of only six months from the start of commercial operations. Fourth, reduction in net present value during construction, due to factors like change in projected cash flows, may lead to credit impairment.

Experts say the new rules will push banks to do project preparation in a more scientific way and give realistic targets for DCCO. RBI has made it clear that lenders must ensure that financial closure is achieved for all projects financed by them and that the DCCO is clearly spelt out and documented prior to disbursement of funds. Banks have to keep provisioning of 5% of the loan amount when a project is in construction phase, which will subsequently reduce as the project progresses.