RBI's Relaxed Financing Norms Offer Minimal Profit Impact: Report

The Reserve Bank of India (RBI) has relaxed project financing guidelines for banks and non-banking financial companies (NBFCs), with Motilal Oswal's report suggesting this will have negligible effects on profitability and balance sheets. Existing books remain unaffected by the changes.

For new project loans, any additional provisioning costs are likely to be transferred to borrowers amid a declining interest rate environment. This could be done through adjustments in yield. The Motilal Oswal report views the RBI's final guidelines as a beneficial move for banks and NBFCs, especially when juxtaposed with earlier, stricter draft proposals.

On Wednesday, the RBI unveiled the Reserve Bank of India (Project Finance) Directions, 2025, outlining detailed norms for income recognition, asset classification, and provisioning for project loans. A key relief is seen in reduced provisioning requirements, significantly lowered to 1% during construction from an initially proposed 5%, and to as low as 0.4% after the Date of Commencement of Commercial Operations (DCCO).

Scheduled for implementation from October 1, 2023, these guidelines provide an enabling framework for regulated entities, addressing inherent risks in financing project loans. The revisions follow consultations with nearly 70 stakeholders, including banks, NBFCs, and government entities.

The eased norms are anticipated to lessen capital strain while maintaining financial prudence. Motilal Oswal notes that the final guidelines strike a balance by ensuring continued project financing with minimal impact on lenders' profitability or financial solidity.

(With inputs from agencies.)