The Reserve Bank of India (RBI) has introduced draft guidelines aimed at reforming project financing standards. These new RBI Guidelines are anticipated to increase interest costs for infrastructure projects but are seen as a necessary step to reduce dependency on foreign component supplies and enhance job creation in India.
Direct Impact on Infrastructure Costs
The RBI’s draft guidelines mandate that lenders, including prominent banks like the State Bank of India (SBI) and Canara Bank, must now allocate 5% provisions on outstanding standard under-construction projects. This move is set to directly impact the financial landscape for infrastructure firms by increasing the cost of borrowing. Dinesh Khara, Chairman of SBI, addressed the potential implications, stating, “The fact remains that if these guidelines become a reality, the pricing of such loans will also be revisited.” This indicates a likely increase in interest rates passed on to companies and, subsequently, to consumers.
Banks’ Strategy on Cost Pass-Through
Canara Bank’s approach mirrors a broader banking strategy to manage increased costs. K Satyanarayana Raju, MD & CEO of Canara Bank, shared insights into the bank’s recent adjustments, “When the RBI hiked risk weight on NBFCs, we partly shifted the hike on the NBFCs, but 95% of customers are intact with us. In fact, that 95% of NBFCs have again applied for loans at higher rates.” This reflects a resilience in customer loyalty despite rising costs, suggesting that banks may manage to pass on these costs without losing clients.
Stakeholder Perspectives and Long-term Strategy
Industry leaders are keenly observing the developments in the new RBI guidelines. L&T’s President & CFO, R Shankar Raman, noted a tightening in regulations after discussions with RBI Governor Shaktikanta Das. He expressed concerns over the selection criteria for projects, emphasizing the risk of low-cost bids from less technically competent entities.
Furthermore, Arun Maheshwari, joint managing director and CEO of JSW Infrastructure, commented on the dual nature of the guidelines’ impact: “The guidelines have long-term benefits, but there may be short-term impacts on investment flows and project delays.” He advocates for policies that encourage continuity and completion within projected timelines to ensure long-term sector stability.
Challenges and Risks in Project Selection
In the competitive arena of project financing, the temptation to select the lowest bidder is high, but this approach carries inherent risks. S Shankar Raman, CFO of L&T, expressed concerns about the potential pitfalls of this strategy. “Promoting a selection of the least cost option for the project actually makes it very risky because somebody may not have the technical competence to bid for a certain project, but because he’s able to give a very compelling price, he becomes the chosen one,” he explained. This highlights a crucial aspect of project financing—balancing cost with competency and ensuring that the lowest bid does not compromise the project’s technical standards and long-term viability.
Provisioning Requirements and Bank Responses
The RBI’s phased provisioning requirements allow banks to adjust gradually, culminating in FY27 with a reduction in provisions once projects are operational. This tiered approach aims to cushion the financial impact on banks. SBI’s Chairman, Khara, reassured stakeholders, stating the bank’s readiness to absorb these changes: “Based on our broad assessments, even the incremental provisions required will not be very significant for us.”
Bank Responses to Draft Guidelines
As the financial sector braces for the implementation of the Reserve Bank of India’s draft guidelines on project finance, banks are assessing the impacts and strategizing responses. SBI Chairman Dinesh Khara detailed their approach to the impending changes.
“We will be reaching out to RBI with our views on the proposal. Let us wait for the final decision by the RBI. Nevertheless, I would only like to say that we have made some broad assessments, and based on that, even the incremental provisions required to be done will not be very significant for us. We will be able to absorb those provisions without much disruption. Also, the fact remains that if it all guidelines become reality, maybe the pricing of such loans will also be revisited,” stated Khara.
This response underscores the proactive steps banks are taking to adapt to regulatory changes while minimizing disruption to their operations and client services.
Also read: Concerto Software Secures RBI Payment Aggregator Licences
Regulatory Goals and Industry Preparedness
The RBI’s initiative appears to be a move towards adopting an Expected Credit Loss (ECL) regime, as indicated by Canara Bank’s K Satyanarayana Raju. This transition aims to fortify the banking sector’s balance sheet in anticipation of potential risks. Atul Goel, MD and CEO of Punjab National Bank, highlighted the guidelines’ intent to instill discipline in project financing and ensure timely project completion, emphasizing the need for banks to adapt to higher provisioning for riskier projects.
As banks and industry leaders prepare to implement these new RBI guidelines, the landscape of infrastructure financing in India is poised for significant changes. These measures are expected to strengthen the financial ecosystem by reducing dependency on international suppliers, thereby supporting the government’s vision of an ‘Atmanirbhar Bharat’ (self-reliant India) and fostering job creation in the sector.
