According to a recent Crisil report, the Reserve Bank of India’s (RBI) final directions on project financing are expected to enhance risk management in this sector. The new guidelines will harmonise existing regulations across regulated entities, thereby strengthening the framework for project financing. This move aims to provide a more robust and standardized approach to managing risks associated with project financing, ultimately benefiting the financial system.
Crisil Ratings Director Subha Sri Narayanan said: “Compared with the draft of May 2024, the final directions improve the ease in doing business for lenders. The provisioning requirements are significantly lower, not only in the case of under-construction projects but also for operational projects.”
The guidelines will be applicable only on a prospective basis, which means the impact on credit costs is expected to be significantly lower than initially anticipated.
The removal of the proposed six-month limit on the moratorium period after the date of commencement of commercial operations (DCCO) will also benefit lenders, allowing them to continue to structure loans in line with the expected cash flows of projects.
The Crisil report notes that the new guidelines introduce changes that will strengthen overall risk management in project financing, compared to existing regulations.
The introduction of limits on the number of lenders and the individual exposure size for projects financed by a consortium would ensure each lender has a higher stake and hence is more proactive in due diligence, credit appraisal, and risk underwriting during the loan tenure. Further, it will enable more efficient decision-making given the lower number of stakeholders and greater alignment of interests.
The new direction brings in a higher base level standard asset provisioning for under-construction projects set at 1 per cent and a slightly higher 1.25 per cent for under-construction CRE exposures (that compares with the extant 0.4 per cent to 1.0 per cent), with step-ups linked to DCCO deferment period.
This higher base level provisioning will bring in a differentiation between provisioning for under-construction and operational projects to address the inherently higher risk in the former.
It also now guides lenders to step up their provisioning cushion aligned to the number of quarters for which the DCCO has been extended, in case the risk characteristics of a funded project change, the report states.
The new guidelines impose stricter conditions on permitted cumulative DCCO (Delayed Completion Cum Cost Overrun) deferment for maintaining ‘Standard’ asset classification. For infrastructure projects, the deferment period is reduced to up to 3 years, regardless of the reason. In contrast, for non-infrastructure projects, the deferment period remains at 2 years.
This could pose a challenge for lenders in cases of long-drawn litigation, but allows earlier recognition of stress and adoption of necessary steps to address the same, albeit with higher provisioning, the report added.
Inputs from IANS
