Banks seek for relaxation in norms of classifying loans of delayed infrastructure projects

In the recent meeting with Finance Minister Pranab Mukherjee the bankers have raised an issue of infrastructure financing where they have asked for tax breaks for accessing cheaper funds to finance infrastructure projects. The lenders are demanding for the relaxation in the norms of classifying loans of delayed infrastructure projects as sub-standard assets even though the Reserve Bank of India (RBI) has given its unwillingness to lower the group exposure ceiling.

The suggestions put forwarded in the meeting included permission for the issuance of tax-free bonds, access to refinance and tax exemptions on loans for infrastructure projects under the Income Tax Act. However the government has already given approval to India Infrastructure Finance Co (IIFCL) to issue tax-free bonds and banks have also wanted the similar facility.

The sources say, the central bank is not keen on relaxing the group exposure ceiling in spite of government urge. It is believed that higher ceiling might create concentration risk for certain industrial groups.

In July last RBI had issued the master circular on exposure norms which stated a scheduled commercial bank’s exposure to a single company is restricted at 15 per cent of the capital funds, along with an additional exposure of 5 per cent allowed for financing infrastructure projects. Likewise, the exposure ceiling to a group of companies is restricted at 40 per cent, along with an additional 10 per cent lending permitted for infrastructure projects.

As many infrastructure project developers, especially of the power sector, have been raising the issue, therefore finance ministry had written to RBI lookout for relaxation.

On the other hand bankers present at last week’s meeting informed that the central bank has pointed out that it would not relax the ceiling. “Exposure beyond 50 per cent can create problems, especially during uncertain times,” stated a bank chief. A senior executive of an infrastructure-focused finance company also has the view point that the ceiling should not be raised.

Sources informed that in the meeting, the banks have requested the apex bank to simplify the provisioning norms for those infrastructure projects which were unable to start repayment on schedule due to project delays. A banker informed, “There are a lot of projects where implementation is delayed by a few months, but banks have to make provisions. It is not a case of default, but the provisions have to be made”.

As per RBI guidelines, regarding infrastructure projects financed by banks and financial institutions after May 28, 2002, the completion date should be clearly mentioned at the time of financial closure. From April 1 last year, if the date of commencement of commercial production is beyond two years as originally predicted, the account should be taken as a sub-standard asset, which requires provisioning.

In November 2008, RBI has given special relaxation in the rules for seven infrastructure projects which, post-restructuring continued to be treated as standard assets.

The projects which were given relaxation included Nandi Economic Corridor, gas-based power projects of GVK Industries, Gautami Power, Konaseema Gas Power, Vemagiri Power, a development project of Tirupur area and another being implemented by Delhi Gurgaon Super Connectivity.

Besides this, loans restructured under the special scheme announced last year can also be treated as standard assets in spite of restructuring.