Globally, project financing is treated as “sans recourse” financing — i.e. the project repayment is expected to happen from the standalone cash flows of the project without any external support or comfort.

However, no lender is willing to look at project financing as was originally intended and insists on an additional comfort as a measure of precaution rather than diligence, lest, the project economics goes haywire.

It is natural that lenders and the RBI view this area with caution. While the RBI has been fine-tuning its instructions on identification of problem assets over the last four or five years, the draft guidelines tightening the norms for project lending calling for increased provisioning has attracted comments from all stakeholders.

Why the changes

Banks have strengthened their underwriting standards in the area of commercial advances and with the “twin balance sheet” problem being more or less addressed, lending to corporates is gaining traction as can be seen by the guidance given by the major banks for FY25.

Given this backdrop, it is only prudent for the regulator to anticipate the growth in lending especially on the infrastructure side and initiate steps for a guided and controlled growth. Lenders and corporates have, however, sought a relaxation in the additional provisioning norms.

Fears and mitigants

An article carried in businessline (May 31) raises two points on the impact of the draft guidelines:

(i) Will the cashflows of the existing projects be sufficient to service the additional cost arising as a result of this provisioning? The author also spoke of the stress tests (simulated scenarios) a project is subjected to, before the decision to sanction a loan or not is taken.

ii) Interest rate sensitivity is an integral part of project assessment and ongoing projects should be subjected to a quick analysis to see if the additional cost devolving on the project can be met or not, by the estimated cash flows.

While projects close to attaining maturity (as the provisioning incidence would be lower) and those sanctioned but not disbursed (as a quick reappraisal of the project can be done and safeguards built in) are not such a worry, it is the projects under implementation which need greater attention.

Complex directives

While the concerns over the loopholes— be it in the form of padded up costs to avail cost overrun funding, inflation of project costs to secure a higher standby facility and tendency to avail a longer moratorium — are not unfounded, certain mitigants are also available to prevent this.

Infrastructure financing in India has now evolved and lenders have learned valuable lessons over the last two decades.

Widely accepted thumb rules like cost per MW and debt per MW (for power projects), cost of construction per km in the case of road projects (both for normal terrain and hilly/difficult terrain) arrived through cost comparison of the various projects financed by lenders, have become the norm over the years.

Comparing the project costs with these “thumb rules” will give an indication if the costs are inflated or padded up. A similar approach is used for cases seeking extended moratorium.

If infrastructure lending is expected to grow, the recent observations by the Finance Minister, that the recently established NABFID should focus on this aspect and that commercial banks should only do routine banking is not the right prescription.

At this juncture, NABFID as an organisation is evolving and will definitely take some more time to mature.

That apart, banks such as SBI, IDBI and ICICI have a wealth of experience in the area of project finance and allowing that to remain unutilised and gradually wither away would be a gross injustice.

The writer is former Deputy Managing Director, State Bank of India

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