Lenders' Credit Costs May Rise By 20-25 Bps On Under-Construction Projects

Reserve Bank of India’s new project finance norms, will increase credit costs for lenders, three infrastructure lender officials told NDTV Profit.

These norms will translate into a 0.20-0.25% rise in credit costs during the construction period, impacting lenders' profitability depending on the tenure of the loan. This will be transmitted to borrowers, two public sector officials said, speaking on conditions of anonymity.

The final guidelines mandate a 1% standard asset provisioning during the construction phase of a project, up from the current 0.4%.

The requirements for under construction CRE exposures will be, however, slightly higher at 1.25%. According to the final norms, the standard asset provisions shall rise by 0.375% for each quarter of deferment of the date of commencement of commercial operations.

The provisioning hike will make lenders cautious in fixing the DCCO, as delays beyond the permitted extension period up to three years for infrastructure projects will attract additional provisioning, increasing the cost of delays, one of the three officials quoted above said.

This creates a strong incentive for timely project completion, but raises concerns about higher credit costs even for strong borrowers such as NTPC Ltd. This is because the new guidelines do not factor in project ratings, the second official said.

While the provisioning will be higher than before, most non-banking financial companies’ existing models based on expected credit loss norms already account for similar provisioning levels, so the impact will be manageable for major project financiers.

"...Large part of existing project finance exposure of banks and IFCs (infrastructure finance companies) will not be impacted as this circular is not applicable to projects which have achieved financial closure," Emkay Global Financial Services said in a note.

These guidelines are positive for public sector banks which have a higher exposure to project finance loans, the brokerage said.

Currently, State Bank of India and other infrastructure lenders, including India Infrastructure Finance Ltd., Indian Renewable Energy Development Agency Ltd., Housing and Urban Development Finance Corp., National Bank for Financing Infrastructure and Development, Aseem Infrastructure Finance and India Infradebt Ltd. are major players in this space.

Banks extended loans worth Rs 13.11 lakh crore to infrastructure sector borrowers as of April end, according to the last available RBI data.

Overall, non-food credit growth was up by 11.2% year-on-year in April to Rs 177.42 lakh crore, compared with 15.3% a year ago.

Experts at rating agencies believe that higher provisioning during construction periods could increase the cost of debt, potentially slowing down India’s infrastructure momentum. They also said that banks may pass on these costs to developers, raising overall project financing costs and possibly affecting bidding appetite in infrastructure sectors.

"Limited impact expected on NBFCs as sufficient provisions are provided as per the expected credit loss assessment and provisioning at present is closer to the requirement as per the guidelines. Also, the provisions are applicable prospectively, from Oct. 1, 2025 and, thus overall impact for lenders shall be limited," said A M Karthik, senior vice president and co-group head, financial sector ratings, ICRA Ltd.

On May 3, 2024, the central bank had proposed that lenders be required to increase provisions to 5% of the loan amount disbursed for projects in the construction phase. So far, this requirement was set at 0.4%.

When the project becomes operational, this can be reduced to 2.5% and then lowered to 1% once the project reaches net positive cash flow and repays 20% of the dues, the RBI had said in its draft circular.

This circular had caused a stir in the industry, with banks and non-banking financial companies urging the RBI to ease these norms.

Following this, RBI Governor Sanjay Malhotra had extended the timeframe for the implementation of the liquidity coverage ratio and the new project finance norms in the February monetary policy meeting, as the earlier deadline did not provide enough time.

RBI also eased liquidity coverage norms for banks, compared to what the draft guidelines had recommended.