Heading: RBI Draft Rules for Project Finance May Raise Provisioning Burden on Banks, Says Report

The Reserve Bank of India (RBI) has proposed draft rules for project finance that may lead to Indian banks, both public and private, having to make an incremental provisioning of 10 to 20 basis points. According to a Care Edge report released on May 27, public sector banks could see an impact of up to 20 bps for the next three years, while private sector banks may face up to 10 bps for the years from FY25 to FY27.

The report also highlighted that banks are likely to prepare for the adoption of the expected credit loss (ECL) framework over the period, with ECL provisioning potentially overlapping with the implementation of these new norms. For non-bank financial companies, the impact is expected to be limited, with Tier 1 capital potentially reducing by up to 83 bps over three years.

The RBI’s draft guidelines aim to ensure higher provisions for under-construction infrastructure projects and strict monitoring of emerging stress. This move comes in light of past defaults on infrastructure loans that strained the banking system. The central bank has proposed that banks set aside a provision of 5 percent of the loan amount during the construction phase, which can be reduced as the project progresses.

The RBI has called for comments on these proposals by June 15 before finalizing the rules. The aim is to ensure better risk management and monitoring in the financing of project loans, especially in the infrastructure sector. Stay tuned for more updates on this evolving story.