Reserve Bank of India suggests stricter regulations for project finance | Business News

The Reserve Bank of India (RBI) has proposed tighter rules to govern lending to projects under implementation, aiming to prevent a build-up of stress on bank books. The central bank’s draft rules include a classification of projects based on their phase and higher provisioning of up to 5 per cent during the construction phase, even if the asset is standard.

During the last credit cycle, project loans were identified as a major contributor to the stress on bank balance sheets. The standard asset provisioning currently stands at 0.40 per cent, but under the proposed norms, banks will have to set aside 5 per cent of the exposure during the construction phase. This provision decreases as the project moves into the operational phase, eventually reaching 1 per cent under certain conditions.

The proposed guidelines also outline details on stress resolution, criteria for upgrading accounts, and recognition protocols. Lenders are expected to maintain project-specific data in an electronic and easily accessible format, updating any changes in parameters promptly.

The public has until June 15 to respond to these proposals, which were first announced in September 2023 and detailed on Friday. The RBI aims to enhance the monitoring and management of project loans to ensure the stability of the banking sector. Stay tuned for further updates on this developing story.