Workers labor at a construction site in Amargarh, Jammu and Kashmir, India. (Photographer: Dhiraj Singh/Bloomberg)

Infrastructure Lending Might Get Sidelined As RBI Refuses To Budge On New NPA Rules

With the Reserve Bank of India giving no relaxation to its Feb. 12 framework on resolution of stressed assets, banks are likely to become more cautious and risk-averse to long-term funding, especially to the infrastructure sector, say lenders.

On Feb. 12, the central bank had issued a revised framework for resolution of stressed assets. The new set of rules aim at quick reporting of defaults, devising resolution plans for defaulting companies and time-bound referrals of defaulting firms to the National Company Law Tribunal.

Owing to certain stringent criteria in the new framework, which includes a one-day reporting of defaults, lenders have asked for some leniency but the apex bank has not granted any relaxation to its Feb. 12 circular.

“The RBI is very clear that they are not going to give any relaxation. The banks will hence become very cautious and risk averse, particularly on long-term funding in sectors such as power, road and ports,” said a senior banker.

Also read: BQExplains: What RBI’s New Bad Loan Resolution Framework Means

Bankers said that most of the restructuring happens in long-term projects in the infrastructure sector. For nation building, funds are required in the space, but it is important to note that these projects entail high risk due to which banks will be very conservative, said another banker from a large state-run bank.

“The issue with long-term funding is that in these kinds of loans there are lots of variables like land acquisition, environment clearances or technical reasons that cannot be factored in at the time of loan sanctioning. If a loan is given for one year then there are fewer risk factors at play and we can visualise the kind of issues that particular project will face over that period. But, if I am talking of 12 years, it is very difficult for us to visualise the issues,” the banker cited above explained.

Under the framework, bankers will have to implement a resolution plan to revive a defaulting company within 180 days. If the plan is not implemented within the stipulated time, the account will have to be referred to NCLT for resolution as per the Insolvency and Bankruptcy Code.

The new plan requires approval from all the banks, in a consortium, for any resolution plan. Banks requested the RBI to make the required majority to 75 percent for any such plan. But they are yet to hear from the regulator.

Also read: NPAs Will Not Increase Under RBI’s New Rules, Lenders’ Body Says

In the revised framework, the RBI also discontinued earlier restructuring schemes like the corporate debt restructuring, strategic debt restructuring and scheme for sustainable structuring of stressed assets. Lenders had urged the central bank to let these restructuring schemes be operational for some more time, to no avail.

In a recent speech, deputy governor N S Vishwanathan had defended RBI’s Feb. 12 framework, indicating there would be no relaxation in the new set of rules.

“The RBI, as a regulator is trying to bring in the discipline and will always look at from a systemic perspective, but banks will have to evaluate it (any rule) from the overall implication on their balance sheets,” said another senior banker.

“Nobody has said that this (revised framework) is not doable. What banks are saying that they need sometime to switch over. Both the industry as well as banks have to prepare themselves for the new set of norms...this could be done in a phased manner,” the banker added.

Also read: Forced Liquidation Not The Intention Of New RBI Rules, Says Sanjeev Sanyal