RBI’s new 5/25 norms will help infra projects
In the absence of a vibrant bond market, or meaningful take-out financing, it has been left to banks to shoulder the responsibility of financing the bulk of infrastructure projects in the country. Despite the high level of risks associated with such funding, primarily arising out of an asset-liability mismatch—infra projects are long-term affairs while deposits are raised for much shorter tenures—banks have lent a fair amount; the outstanding exposure that banks have to the infra structure sector is close to R9 lakh crore, more than a tenth of the total non-food credit in the system. While it is possible the due diligence for many of these ventures may not have been done as meticulously as it should have, it is a fact that projects haven’t got off the ground on time because environment clearances have been delayed or because fuel linkages weren’t given in time. Moreover, a slowing economy has resulted in profits that are much smaller than were pencilled in a few years ago when it was believed growth would come in at a secular 7-8%.
That has resulted in a cash crunch with companies, at times, unable to meet their loan repayments. The problem lies in that infra projects have a long gestation period with the concession periods for roads, for instance, anywhere, between 20 and 25 years, whereas banks are looking to recover their loans in 12-15 years. That, more often than not, means promoters are paying larger instalments in the initial phases of the project, which not just puts profits under pressure, in some cases it puts the project in jeopardy. The smaller cash flows also mean they can’t infuse equity into other ventures they may have sponsored. As RBI has pointed out, the repayment tenure for long gestation projects needs to bear a correlation to the period during which the project generates cash flows. Having recognised this, the central bank had said earlier this year, that banks could refinance fresh exposures to infra projects every five or six years on new terms, without asking them to classify these as restructured loans. However, since banks aren’t really taking on much new exposure, the leeway given to them had limited impact.
The central bank has now relaxed the norm, allowing them to refinance existing infra loans, rather than only new ones, albeit only those where commercial production has started. This should help banks rework loan schedules and prevent a good number of accounts from turning bad. Since these exposures will not be classified as restructured loans, banks will save capital since restructured assets call for a minimum provisioning of 15%.