RBI likely to allow graded provisioning for project finance loans

The Reserve Bank of India (RBI) is likely to relax its proposed provisioning norms for project finance by introducing a graded framework, moving away from the earlier recommendation of a flat 5 per cent provision for all under-construction loans, sources told Zee Business.

In the May 2024 draft circular, the central bank proposed that commercial banks make a standard 5 per cent provision on existing project loans under implementation. This provision was proposed even in case of normal loans showing signs of stress. Many lenders and infra developers opposed this approach. 

Banks warned that the blanket rule could lead to costlier borrowing, as the additional provisioning would have to be factored into the pricing of loans. In sectors like roads, railways, and utilities — which already have narrow financial margins — this could render many projects financially unviable.

Small and mid-sized banks, with relatively limited capital buffers, are set to be particularly impacted. These lenders fear that stricter provisioning could crowd them out of long-gestation project lending altogether, also reducing competitive options for borrowers and concentrating risk in larger banks.

Lenders asked the RBI to exempt existing loans from the new rules to avoid disrupting ongoing projects. The RBI is considering a risk-based approach, where provisioning would be linked to the project’s inherent risk. This means higher provisioning for riskier sectors like mining and lower provisioning for stable sectors like renewable energy.

This approach aims to encourage better credit risk assessment without hindering infrastructure development. The RBI’s new governor, Sanjay Malhotra, is known for a more consultative policy tone, and this move reflects that.

While the RBI remains firm on early risk recognition, it may allow banks to adjust provisions based on project performance. Bankers believe the RBI’s openness to revision is driven by the recent slowdown in credit growth, and burdening banks with additional capital requirements could further dampen loan growth.

The proposed framework could serve as a middle ground, giving lenders flexibility to price risk accurately while maintaining regulatory safeguards.