Concerned about the Reserve Bank of India’s (RBI’s) draft proposal that will require lenders to set aside 5% initially as provision for infrastructure projects – both existing and new – some public sector banks have started hedging the risk.
Sources said some lenders, including Canara Bank, Union Bank of India and Bank of India, are considering introducing a new clause for fresh loans, specifying that the lender may pass on any additional cost they may incur.
Canara Bank is understood to have taken steps in this regard. “We have already inserted a clause while making fresh sanctions. Any extra cost arising out of regulatory requirement can be passed on,” an official said. Canara Bank has a project finance portfolio of about Rs 1.10 trillion.
Union Bank is planning to put in a specific clause for project financing so that any increase in costs on account of the RBI regulation can be passed on, an official indicated. The final interest rate hike on project finance loans will be decided once the final RBI norms are issued, the person added. Union Bank’s project finance loans account for 28% of the lender’s `2.96 trillion corporate loan book. Other lenders that are contemplating similar measures include Bank of India.
Canara Bank, Union Bank and Bank of India did not respond to queries sent by FE till going to press.
State Bank of India (SBI) chairman Dinesh Khara had said in the post-earnings interaction with the media that while it will be able to absorb the additional provision requirement if RBI guidelines become a reality, the pricing of these loans may be revisited.
“Also, the fact remains if all this becomes a reality, maybe the pricing of such loans will be revisited. Perhaps they (RBI) have in mind that risk is not properly priced,” Khara said.
A spokesperson for SBI said the lender does not formulate its policy based on the draft guidelines. In addition, it has not come out with any policy on passing on the cost of provision in respect of draft Prudential Framework for IRAC and Provisioning pertaining to project loans.
“The matter will be deliberated and acted upon on the basis of final circular instructions of RBI in the matter,” the spokesperson said. The final date to send feedback to the RBI on draft project finance guidelines is June 15.
The RBI, in its May 3 draft guidelines, said lenders should maintain a provision of 5% for loans extended to under-construction projects. These provisions can be made gradually in phases till FY27. Once the project enters the operational phase, the provisions can be reduced to 2.5% of the funded loans. It can be further reduced to 1% of the funded outstanding provided that the project has achieved certain operational viability metrics.