Indian banks’ body set to urge Central Bank to retain low provisioning for infra loans

IBA, a representative body of Indian banks, plans to formally urge the RBI to roll back the proposed measure before the June 15 feedback deadline, arguing it will unnecessarily increase costs and impede project financing.

The Indian Banks’ Association (IBA) is preparing to lobby the central bank against its proposal to sharply raise the amount of capital lenders must set aside as provisions against infrastructure project loans, three banking sources told Reuters.

Last month, the Reserve Bank of India (RBI) proposed that banks and non-bank lenders provision 5% of the total loan amount for infrastructure projects in the construction phase – a steep hike from the current requirement of just 0.4%.

However, the IBA, a representative body of Indian banks, plans to formally urge the RBI to roll back the proposed measure before the June 15 feedback deadline, arguing it will unnecessarily increase costs and impede project financing critical to economic growth.

Instead, the banking lobby wants additional provisioning only applied in cases where projects face delays in completion, rather than across the board from the outset.

The proposal has raised concerns within the banking sector about reviving financial strains from 2012-2013 when excessive exposure to infrastructure projects led to widespread defaults that crippled the banking system.

As India now embarks on a new infrastructure investment drive to boost its pandemic-hit economy, banks are wary of any measures that could curb lending or make projects too costly.

The IBA convened to collate feedback from individual member banks before finalizing its stance to send to the RBI.

Lenders argue the current 0.4% provisioning level is sufficient, given improved risk management practices. They feel raising the required buffer to 5% could disincentivize lending to critically needed infrastructure development.

The RBI’s proposal aimed to enhance prudence and force banks to adequately provision against risks associated with complex, long-gestation projects prone to delays and cost overruns.

However, with economic growth still recovering from COVID-19’s impacts, the IBA seems set to urge the central bank to refrain from tightening provisioning norms that could constrain infrastructure investment and sector lending.