Government officials are currently assessing the draft rules proposed by the Reserve Bank of India, which call for higher provisioning in infrastructure projects. It is anticipated that lenders will oppose these rules on various platforms. Concerns have been raised by officials regarding the potential consequences, fearing that they might result in an increase in interest rates and disrupt the momentum of capital expenditure.
According to individuals familiar with the matter, once the evaluation process is complete, the draft rules will be deliberated upon with the banking regulator during consultations.
The announcement of these proposals caused a decline in the shares of state-owned banks, non-banking finance companies (NBFCs), and infrastructure firms a day earlier. Investors expressed apprehension that the norms, if enforced, could negatively impact financials.
"These guidelines are currently in draft form, and discussions are ongoing. All stakeholders will attempt to reach a consensus in managing risks while facilitating infrastructure financing," stated a finance ministry official. They further added that if banks and other ministries raise any concerns, they will be conveyed to the RBI. Comments on the proposed guidelines have been solicited by the regulator until June 15.
Banks are also preparing to advocate against the substantial increase in provisions to the central bank. They argue that such a move might hinder the momentum that has propelled India to become the fastest-growing major economy amidst global uncertainty. The lenders are expected to convey their opposition to the proposals through the Indian Banks' Association (IBA), as indicated by senior bankers. They contend that imposing higher provisions for ongoing projects could jeopardize their feasibility, leading to increased costs, potential delays, and an increase in stressed loans.
Officials mentioned above stated that state-owned NBFCs in the power sector such as REC and Power Finance Corp will directly communicate their perspectives to the regulator. Additionally, the Department of Financial Services will address any concerns raised by state-owned lenders.
"This increase is quite significant, especially considering there are no apparent risks evident in project finance," commented a senior executive from a private sector bank. "The rationale behind the RBI's decision to sharply increase provisions remains unclear, particularly when examining banking results or fresh slippages, which are lower than the anticipated recovery."
