India Pushes RBI to Loosen Infrastructure Financing Rules

November 11, 2013 Posted by India Briefing Reading Time: 2 minutes

Nov. 11 – Arvind Mayaram, economic affairs secretary at the Indian Finance Ministry, has called upon Raghuram Rajan, governor of the Reserve Bank of India (RBI), to transform the rules relating to infrastructure financing as well as the treatment of non-performing loans in that sector. The Finance Ministry views these potential moves as key to reviving growth and investment in India.

In particular, the Ministry would like to see the new rules take effect in cases where infrastructure projects were delayed but not at the fault of the developers. These types of projects should be allowed to refinance without being treated as restructured loans as that would require higher provisioning.

“During the last three years, on account of [the] economic downturn, we are seeing an increase in such projects. There is, therefore, a need for the RBI to permit refinancing without it being treated as [a] restructuring of the loan,” said Mayaram.

Currently, projects worth over Rs 15 lakh crore have suffered from delays due to problems with various clearances. The newly created Cabinet Committee on Investment and the Project Monitoring Group (PMG) are being empowered to speed up the clearance processes. As of now, the PMG is closely monitoring the implementation of 99 projects worth a total investment of Rs 3.6 lakh crore.

While the government is being successful at fixing the regulatory issues affecting these infrastructure projects, the financial issues still need resolving. When a project is delayed, for example, it requires restructuring before it can start. Part of the problem for the banks is that financial restructuring involves higher costs as they have to increase the provisioning of the asset in question.

Essentially, the Finance Ministry wants there to be a clear line between the definitions of rescheduling and restructuring loans. Thus, projects that have been delayed due to such issues as environmental clearance and land acquisition should have their loans treated as being rescheduled. For cases where the repayment program has to be extended as a result of issues that may or not be beyond the developer’s control, the loans should then be treated as being restructured.

Additionally, the Ministry is also pushing the banks to enhance their risk management system in order to help prevent projects from becoming non-performing assets.

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