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RBI proposes tighter rules for under-construction infra project financing

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RBI proposes tighter rules for under-construction infra project financing
Before completing the rules, the RBI requested feedback on its proposals by June 15.

On Friday, the Reserve Bank of India (RBI) recommended to lenders that they increase the amounts set aside for infrastructure projects that are still under development and requested that they maintain close oversight of any potential stress.

“Taking into account the experience of banks with regard to financing of project loans,” the RBI stated in its proposed recommendations.

Due to excessive lending, Indian banks saw significant defaults on infrastructure loans beginning in 2012 and 2013, which put pressure on the nation’s financial sector.

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The government of India is currently spearheading yet another wave of infrastructure projects in an effort to strengthen the country’s economy.

During the project’s building phase, the RBI has suggested that banks keep aside 5% of the loan amount.

This can be lowered to 2.5% after a project is up and running, and to 1% if it begins to bring in enough money to meet the lenders’ demands for payback.

A 2021 circular that can be seen on the RBI website states that project loans that were not yet past due or under stress were subject to a 0.4% provision.

Lenders should start resolution strategies well in advance and continuously monitor the accumulation of stress in projects, according to the central bank.

Additionally, the regulator stated that lenders must have a minimum 10% exposure when working in a consortium to fund projects up to 15 billion rupees ($179.92 million).

According to the RBI, the floor may be set at 5% for larger projects.

It requested that banks have unambiguous knowledge of when a project is anticipated to start making money and boost reserves in the event that activities are postponed.

The central bank recommended that loans for infrastructure projects should be reclassified from normal to stressed if delays exceed three years.

Before completing the regulations, the RBI has asked for feedback on its ideas by June 15.

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