1. Editorial: Financing stuck projects

Editorial: Financing stuck projects

Blanket RBI forbearance may not be a good idea

By: | Published: December 30, 2014 2:58 AM

For more than two years now, banks have seen their asset quality deteriorate in the wake of a slowing economy; loans have either turned bad or been restructured to bail out borrowers. Either way, it has necessitated setting aside more capital by way of higher provisioning and, in the event the loan was written off, the capital was lost. Even as the quantum of  loans restructured grew—in FY13 and FY14 loans worth R78,498 crore and R1,01,431 crore, respectively, were recast—Reserve Bank of India (RBI) tightened the provisioning norms making it more expensive for banks to recast loans. From March next year, not only will the provisioning for a restructured loan go up to 5%, it will need to be classified as a sub-standard asset. It is not surprising, therefore, that banks are reluctant to add exposure to an asset if it means the loan will be classified as a restructured asset. That is why they are hesitant to back projects which have seen a cost overrun of more than 10% even though these may have all with necessary clearances in place—this is why, despite $100 billion of projects being cleared by the Project Management Group, there has been very little movement on these projects. RBI norms require such exposure to be classified as restructured if the additional cost is funded by banks, and bankers argue that would be an added expense. They would like some degree of forbearance for projects that are viable after taking into account the cost escalation, but so far the central bank hasn’t allowed them this flexibility.

RBI, for its part, has extended banks concessions on infra projects; after a recent relaxation, banks can now re-finance an existing project, every five or six years on fresh terms, without classifying it as restructured; earlier this was allowed only for new ventures. The central bank has been saying it wants to give banks more flexibility without compromising on forbearance and it would probably not wish to water down its stance. To be sure, it is not just the reluctance of banks that is holding up these projects; it’s a fact that many of the promoters are unable to come up with the additional equity needed to maintain the debt-equity ratio at 70:30. In which case it might be a good idea to re-assess the viability of the project after all clearances have been given, and offer it to another promoter who has the financial muscle to take it on, making it a fresh venture altogether. It is possible many of the projects may not take off at all but at this stage, diluting discipline, when it comes to lending norms, might not be a good idea.

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