The Indian Banks’ Association (IBA) will ask the central bank 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 Wednesday (Jun 12).
Last month, the Reserve Bank of India (RBI) proposed that banks and non-banking financial companies (NBFC) set aside a provision of 5 per cent of the total loan amount of infrastructure projects at the construction phase, a sharp jump from the 0.4 per cent required currently.
“The blanket 5 per cent 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 saw large defaults across infrastructure loans from 2012 to 2013 on account of exuberant lending, straining the banking system.
The country is now seeing another spurt of government-led infrastructure projects as it tries to boost the economy.
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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 Tuesday to deliberate on feedback from individual banks, and is expected to send a formal request before the Saturday deadline ends, the first source said.
The association did not immediately respond to a Reuters email seeking comment.
The Finance Industry Development Council, which represents NBFCs, has formally opposed the RBI’s proposal, suggesting the provision be retained at the current level, Reuters reported on Tuesday.
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. Reuters
