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The Reserve Bank of India's (RBI) final guidelines for project finance loans, aimed at managing risks while supporting the viability of projects, are credit positive according to Moody's Ratings.
Moody's, in a report on Monday, noted that it does not expect a significant day-one impact on profitability at the system level because the guidelines apply only to projects that have not achieved financial closure by October 1, 2025. Furthermore, the global rating agency asserted that the additional provisions (25-60 basis points) apply only to projects specific loans, while other loans (such as term loans, working capital loans) to companies in the infrastructure and commercial real estate (CRE) sector are not impacted. The final guidelines of the RBI, released on June 19, noted that existing projects will not be subject to higher provisioning requirements, which was a reversal from the draft guidelines proposed in May 2024. Moody's, in its report, noted that it expects lenders with large exposures to the infrastructure sector - mostly public sector banks and infrastructure-focused non-bank finance companies (NBFC-IFCs) - to see a slight negative impact on profitability from in-progress loan applications that do not achieve financial closure by October 1, 2025. "Nevertheless, this will likely be a one-off effect," Moody's supplemented. The June 19 guidelines finalise the level of provisioning required on standard assets in the construction and operational phase for all lenders and lay out prudential conditions to improve the viability of the projects being financed by RBI-regulated entities. Notably, the guidelines reduce provisioning on standard assets in the construction phase to 1.0-1.25 per cent from the draft proposal of 5 per cent -- which Moody's claims market participants viewed as "too prohibitive" for project financing. "We expect lenders to pass on the bulk of the incremental cost of provisioning through higher lending rates on subsequent new projects, mitigating the impact on their bottom line," Moody's opined. Additionally, Moody's said it expects the finalisation of guidelines will reduce uncertainty in project financing and support medium-term growth amid substantial government investment, besides expectations of greater private sector involvement. (ANI)
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