The Finance Industry Development Council, the representative body for non-bank lenders, has asked the Reserve Bank of India (RBI) for a review of the proposal to increase provisions that lenders have to set aside against infrastructure project loans.
In May, the RBI proposed that banks and non-bank lenders set aside a provision of 5% of the total loan amount for infrastructure projects in the construction phase. In response, the FIDC has requested the RBI to continue with the standard provision of 0.4% for all projects in the construction phase.
“The enhanced provisioning may be stipulated only for projects where there is an extension in the date of commencement of commercial operations. Such a measure will ensure better project selection by the lender,” FIDC said in a letter to the RBI on Tuesday. It has also opposed the RBI’s suggestion to prescribe minimum exposure limits on lenders for projects financed under consortium agreements.
“The lenders will be required to be part of an agreement jointly with debtors. This will ensure that rights and duties of parties will be clear, unambiguous and protected,” the letter said.
The FIDC has also asked the RBI not to implement the 10% limit on funding cost overruns. The NBFC body explained that cost overruns may happen for various reasons, including those which are beyond the control of borrowers or lenders. Here, any cap has the potential of inhibiting the project continuation even after considering extension of the date of commencement of commercial operations. Instead, funding cost overruns must be left to commercial decision making.
The dispensations available under the draft guidelines are only available to those lenders who have extended finance to such projects based on a common agreement between the debtor and lender. However, the NBFC body has requested the RBI to clarify whether this framework will be applicable for loans which were extended prior to such guidelines where there was no common agreement between debtor and the lender.
In a recent report, CareEdge Ratings said if implemented in its current form, the draft guidelines will lead to an up to 120 bps reduction in tier-1 capital of non-bank lenders.
Separately, the FIDC has asked the central bank to enable NBFCs to access the Central Repository of Information on Large Credit (CRILC).