RBI proposes tighter rules for project finance

The Reserve Bank of India (RBI) on Friday proposed to lenders that they set aside higher provisions for under-construction infrastructure projects and asked them to ensure strict monitoring of any emerging stress. The RBI said it issued draft guidelines ”taking into account the experience of banks with regard to financing of project loans”. Indian banks had seen large defaults across infrastructure loans starting 2012-2013 on account of exuberant lending, which led to a strain on the country’s banking system. India is now seeing another burst of infrastructure projects, driven by the government as it tries to boost the economy. The RBI has proposed that banks set aside a provision of 5% of the loan amount when the project is in the construction phase. This can be reduced to 2.5% when a project becomes operational and 1% after the project starts generating cash sufficient to cover the lenders’ repayment requirements.