The Reserve Bank of India is in the process of reviewing the status of loans lent to the infrastructure sector between 2010 and 2015. A specific format has been released by the central bank in which banks exposed to infra loans have been requested to provide to borrower loan data. Great importance is given to the total sanctioned loan amount, sanction conditions, project details, deviations or exceptions to sanction conditions and why they had to be made.
It is also seen whether the project milestones are achieved in accordance with the loan conditions and whether the cash flows generated are in line with the projections at the time of the sanction.
In case of exceptions or deviations from the sanctioning conditions, the RBI asks the banks if the account has now been normalized. Otherwise, banks will provision these loans even if they comply with the RBI’s Income Recognition and Asset Classification (IRAC) standards. The same goes for borrowers generating lower than expected cash flows.
The impact of this exercise will be reflected in the banks’ upcoming March quarter results.
The central bank has not specified the cost of provisioning and it is left to banks’ discretion, although banks assume a provisioning rate of 5-10%.
“Over time, even though these loans may remain standard, the account would have been fully funded,” said a banker who did not wish to be named. According to the bankers, the RBI undertook this exercise more as a precaution to ensure that legacy infrastructure loans do not pose a problem later on. In short, this is an attempt by the regulator to clean up to ensure that banks’ balance sheets are indeed primed for more exposure to the infrastructure sector as the economy opens up.
Between 2010 and 2015, banks had lent about ₹4,83,307 crore to the infrastructure sector according to RBI sector deployment data and almost 80% of these loans have already been canceled by banks. The infrastructure sector is mainly composed of power, telecommunications and road projects, where resolution through the bankruptcy process has not yielded results.
The gross NPA of the banking system was ₹4,53,145 crore as of September 30, 2021. With around ₹1 crore lakh of infrastructure loans under target, RBI’s aim is to ensure that the bad debt bulge does not experience a sudden spike of 25 percent in the short term.
February 27, 2022