Page 53 - Banking Finance July 2024

FEATURES

Are project lending norms

cumbersome?

A n increase in risk weightage by 1250 per cent! established. The risk-adjusted return on capital assumption
is likely to go for a toss because of the provisioning impact.
This is effectively what the RBI has proposed by
The RBI may allow a special dispensation for ongoing
setting a provisioning requirement of 5 per cent
for all project loans, up from the current 0.4 per
lenders to charge more than initially contracted, in
cent, as stated in its May 3 draft Master projects, either lowering the requirement or permitting
Direction on income recognition, asset classification, and proportion to the higher provisioning.
provisioning related to projects under implementation.
Regardless, for all project loans, various stress tests are part of
Most discussions have centered on the absolute level of the appraisal process, and the higher provisioning should ideally
provisioning rather than the implied risk perception fit into one of these scenarios. In existing projects, if project
suggested by the proposed norm. A 5 per cent provisioning viability is compromised due to higher provisioning, it would
levy equates to increasing the risk weightage to 1250 per indicate that debt servicing projection was already precarious.
cent (5/0.4). The impact on the P&L accounts of a project
lender will be identical — the amount will need to be Often, lenders even accept debt coverage ratios barely
reallocated from earnings to liabilities, to the Provision above 1 (cash flows upon repayment), citing mitigating
account or to the Capital account. circumstances. Such loans will now face difficulties if the
draft is fully implemented.
From this perspective, it is evident that the RBI perceives
higher risk in funding projects in both the infrastructure and Clearly, the overall impact on the project finance market and
non-infrastructure segments. The draft Direction applies to economic growth through projects would have been
banks, NBFCs like REC and PFC, and all-India financial considered by the regulator before proposing the 5 per cent
institutions like Nabfid, and allows the 5 per cent provision. The RBI also has a growth mandate, although
provisioning to be achieved gradually by 2027. recently, its role in inflation targeting has overshadowed this
due to the focus on MPC decisions.
Lenders shouldn't worry excessively. In fact, prudence would
dictate that they seek approval from their Boards for a Complex Directions
higher provisioning of perhaps 7.5 per cent or 10 per cent The provisioning norm is actually the least problematic and
for project finance exposures. Logically, if the regulator hints easiest to implement among the norms proposed in one of
at increased risk, lenders should be proactive. the most complex directions ever drafted by the regulator.
No lender could be blamed for feeling that the guidelines,
Pricier Loans with their detailed treatment of exogenous and endogenous

How will lenders manage this additional cost? They will pass risks, resemble a biochemistry chapter more than one on
it on to the borrowers. New loans will naturally be priced income and asset parameters.
higher, and only projects with sufficient cash flows to service
this high-cost debt will secure funding. This aligns with the If the regulator had aimed for simplicity, it could have stuck
regulator's risk assessment, and lenders should comply. to the 90-day default norm, which is clear-cut and widely
accepted. If a project doesn't generate cash flows but
The challenge lies with existing loans where pricing decisions promoters inject funds to service the debt, it should not be
have already been made and debt service coverage ratios a problem.

48 | 2024 | JULY | BANKING FINANCE