Review of legacy infra loans at RBI underway

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The Reserve Bank of India is currently reviewing the status of loans made to the infrastructure sector between 2010 and 2015. The central bank issued a specific format in which banks with exposure to infrastructure loans were asked to provide borrowers with data on the loan. Great importance is attached to the total loan amount sanctioned, the sanction provisions, project details, deviations or exceptions to the sanction provisions and the reasons for this.

It also verifies that project milestones are being met according to the loan terms and that the cash flows generated are consistent with projections at the time of approval.

If exceptions or deviations from the sanction provisions are made, RBI will ask banks whether the account has been normalized in the meantime. Otherwise, banks will accrue for such loans even if they are RBI Standard under IRAC (Income Recognition and Asset Classification) standards. The same applies to borrowers who generate lower than expected cash flows.

The effects of this measure will be reflected in the coming quarterly results of the banks in March.

The central bank has not disclosed the cost of deployment and is at the discretion of the banks, although banks estimate a deployment rate of 5-10 percent.

precaution

“Over time, even if these loans remain standard, the account would be fully serviced,” said one banker, who asked not to be named. According to bankers, the RBI took up this exercise as a precautionary measure to ensure that legacy infrastructure loans would not pose a challenge at a later date. In short, this is a cleansing attempt by regulators to ensure that banks’ balance sheets are actually willing to take further exposure to the infrastructure sector when the economy opens up.

Between 2010 and 2015 banks lent approximately £4.83.307 billion to the infrastructure sector according to RBI sectoral provision data and almost 80 per cent of these loans have already been written off by banks. The infrastructure sector consists mainly of energy, telecom and road projects, where a solution through the bankruptcy proceedings has not yielded any results.

The gross NPA of the banking system as of September 30, 2021 was £4.53.145 billion. With about £1bn of infrastructure loans under the lens, RBI’s aim is to ensure the spate of non-performing loans does not see a sudden 25 per cent surge in the short term.

Published on

February 27, 2022

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