Loans to the infrastructure and construction sectors given by banks have grown by 30% in the past five years. According to the RBI, the total construction and infrastructure loans of banks increased to Rs 14.6 trillion in March this year from Rs 10.8 trillion in January 2019.
The RBI has proposed up to 5% provisions on all existing and new project loans, making bankers jittery about the growth prospects of infrastructure loans.
The draft guidelines, if accepted in the current form, will dent the growth of infrastructure loans going forward, say bankers.
“The provisioning requirements for existing and fresh project loans proposed by the RBI are very high. The draft norms will result in lower returns for lenders in project finance and reduce incremental appetite for infra loans,” the head of wholesale banking at a private bank told FE. “The growth of infra loans will moderate if these draft guidelines are implemented in the current forms,” he added.
As per the draft guidelines issued earlier this month, a bank has to set aside 5% of the exposure during the construction phase, which goes down as the project becomes operational. Once the project reaches the ‘operational phase’, the provisions can be reduced to 2.5% of the funded outstanding and then further to 1% if certain conditions are met. The guidelines are applicable to all commercial banks, including small finance banks and NBFCs.
As per RBI data, bank loans to the construction sector have risen by nearly 26% in the past five years. Loans to the sector have grown from Rs 1.08 trillion in January 2019 to Rs 1.4 trillion as of March this year.
Loans to the infrastructure sector have risen nearly 31% in the same period. Loans to the infrastructure sector have grown from Rs 9.8 trillion in January 2019 to Rs 12.8 trillion as of March this year.
Banks are assessing the implications of these guidelines and will submit their feedback to the RBI.