By Siddhi Nayak
MUMBAI (Reuters) -The Indian Banks’ Association (IBA) will ask the central bank not to change the amount of capital lenders should set aside for infrastructure projects, responding to its proposal to raise such provision amounts, three banking sources said on Wednesday.
Last month, the Reserve Bank of India (RBI) proposed that banks and non-banking financial companies (NBFC) set aside 5% of the loan for an under-construction infrastructure project, a sharp jump from the 0.4% required currently.
“The blanket 5% provisioning requirement will sharply increase the cost of implementing such projects and will hurt project financing,” one of the sources familiar with the matter said.
“In case there is a delay in project completion, additional provisioning requirement should be brought in.”
There were large defaults on such loans from 2012-2013 due to exuberant lending, straining the banking system. Such projects have increased recently as the government tries to boost the economy.
But, since asset quality issues are not very alarming at present, it may not be prudent to implement such harsh provisioning rules, two separate banking sources said.
If the RBI’s proposal is implemented as is, “the impact will be very modest”, Girishkumar Kadam, senior vice president and group head – corporate ratings at ICRA, said at a media briefing.
Kadam said lenders will have higher provision costs and estimated a borrower’s cost of capital will increase by 30-40 basis points.
The IBA met on Tuesday to deliberate on feedback from individual banks and is expected to send a formal request before the June 15 deadline, the first source said.
The association did not immediately respond to a Reuters email seeking comment.
The Finance Industry Development Council (FIDC), which represents NBFCs, has opposed the RBI’s proposal and also suggested not to change to the provision level, Reuters reported on Tuesday.
The IBA will also request the RBI to not implement these norms for loans given before these guidelines, the first source said.
(Reporting by Siddhi Nayak; Editing by Sonia Cheema and Savio D’Souza)
