Infra sector stares at rainy days ahead as RBI tightens infra funding norms

MUMBAI: The sharp increase in the provisioning for financing under-construction infrastructure projects to the tune of 5 percent upfront from the present 0.2 percent as proposed in the Reserve Bank’s draft guidelines on project financing will massively raise the cost of debt leading to dampening of the bidding appetite from infrastructure developers in the medium-term, warns a report.

The monetary authority on May 3, issued draft guidelines for project financing which seeks to increase the provisioning for under-construction/delayed infra projects in a staggered manner as the central bank has found evergreening of dud loans.

The objective is to ensure that lenders do better and more realistic project appraisals and also align the NPA reporting norms in this segment with the rest of the credit market.

The suggestions are so stringent that since the two trading days since the guidelines were issued seeking industry comments, the infra and financial services sector stocks were bleeding, loosing almost 4-5% in two days.

According to Careedge Ratings, the sharp increase in the provisioning for standard assets to 5% for all fresh and existing project loans from 0.2% in a staggered manner in under-construction projects, will have a direct impact on the cost of debt, which will dampen the bidding appetite from infrastructure developers in the medium-term.

The draft guidelines are implemented as proposed, this will present funding challenges for both under-construction and operational infrastructure projects.

A mandatory tail period accounting for 15% of a project’s economic life will restrict the ability of infra projects to secure additional top-up loans, this according to the agency will necessitate an 8-10% increase in equity requirements for HAM-based road projects to align the loan tenure with 85% of the economic life for concessions lasting 15 years.