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RBI proposes stringent rules for funding under-construction projects: What will be the impact?

With a focus on reducing NPAs, the proposed regulations require banks to provision up to five per cent of the loan amount during the construction phase, with adjustments as the project progresses.

Edited By: Nitin Kumar @Niitz1 New Delhi Published on: May 08, 2024 18:05 IST
RBI
Image Source : FILE PHOTO Reserve Bank of India (RBI) building.

The Reserve Bank of India (RBI) has proposed stricter regulations regarding loans for under-construction projects. The central bank's draft regulations suggested classifying projects based on their stages and provisioning up to five per cent during construction. Previous project loans had increased pressure on bank balances due to Non-Performing Assets (NPA). Through this, RBI aims to reduce banks' Net Performing Assets (NPA).

Background and rationale

During 2012–2013, banks heavily funded the infrastructure sector, leading to significant defaults and increased pressure on the banking system. With extensive ongoing infrastructure projects in India, banks are cautious about funding. RBI's directive aims to prevent a situation similar to 2013 and reduce NPAs.

Key proposed measures

The proposed norms require banks to set aside five per cent of the loan amount during the construction phase. However, this proportion decreases as the project progresses. RBI announced these guidelines in September 2023, seeking feedback from stakeholders by June 15. Financial institutions must update any changes in the loan's parameters within 15 days. The necessary infrastructure for implementing these guidelines will be established within three months.

Anticipated impact

Banking experts believe the new rules will prompt banks to prepare a project's blueprint more scientifically to achieve realistic goals. RBI emphasises banks ensure financial closure for all funded projects and complete proper paperwork before disbursing funds.

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