RBI News: RBI wary of easing capital rules for lending to infra companies
Pushed by infrastructure companies and developers, the lender lobby has recently approached the central bank to let banks assess the risk of an infrastructure company based on its cash flows and the nature of counterparties.
For example, if an energy company has entered into a power purchase agreement with
or any other quasi-sovereign entity, banks should be permitted to assign a lower risk weight to such lending exposure once the operating company’s project execution has been completed and the plant has begun selling electricity. electricity to the public sector company.
“The argument is that once the power plant is operational, the bank’s ultimate exposure is to NTPC, not the private sector company that operates the plant. And since NTPC would not default, lending to the private company should ideally carry less risk. So a higher risk weighting would apply when the plant is under construction, but a lower risk weighting should be allowed when it is operational,” said a senior banker.
A lower risk weighting reduces the capital a bank has to allocate to the loan and, to some extent, lowers the interest rate for the borrower.
With a risk weight of 100% – typical for exposure to a private sector infrastructure operating company – prescribed regulatory capital adequacy of 9%, a bank would require a minimum capital or equity capital of Rs 9 crore for each loan of Rs 100 crore to the project. But if the risk weighting is lowered to 20% – once the plant starts supplying power to NTPC – the minimum regulatory capital needed would be Rs 1.8 crore. A lower risk weighting would allow a bank to fund more projects with the same capital without diluting equity and passing less interest on to the borrower.
“The industry body had proposed that capital be allocated to infra loans based on the ‘expected loss’ methodology which is typically used for loan provisioning. RBI said the expected loss must be funded by the bank’s profits and not by capital. Thus, the suggestion was rejected, but this decision indicates the slowly mounting pressure to find financing for more projects at manageable interest rates. There are no easy answers to infra funding and the situation has become more difficult, with some banks distancing themselves from such exposures following a bad experience. And RBI can’t forget the IL&FS fiasco,” said another person familiar with the development. A spokesperson for RBI did not respond to ET’s questions.
Infrastructure developers pitch their case to credit rating agencies agreeing to assign differential ratings based on a project’s terms and characteristics. There are cases where two branches of the same group – the airport company and the energy company – have different ratings, with the airport company being rated a few notches higher than the power generation company due to better flows of cash flow, contractual arrangements and the nature of counterparties .
Thus, they argue that if rating companies can assign a higher rating (or assign a lower risk) based on these elements, so can a bank.
But RBI, which has been skeptical of the style and operation of some rating agencies on several occasions, prefers a more conservative approach. According to sources, the central bank, during the annual audits of rating companies, has raised eyebrows over the practice of awarding a higher rating to a company whose finances are not rosy but whose current cash flows are comfortable.
“Despite accumulated losses, an infra company can still have a decent rating if the contractual agreements are strong, there is a stable annuity stream from a road project, or the fuel supply agreement is in place. place, etc. But RBI had reservations about such an approach. Although it was never mentioned in the final inspection reports, RBI officers raised these issues verbally during the audit,” said said an industry official.
With such a regulatory stance, RBI’s reluctance to relax capital regulations for infrastructure is probably understandable – as loan risk weights could vary from bank to bank under the proposed scheme, unlike current regulations where risk weights for various types of loans are prescribed by the regulator. But, in the absence of any ready model to finance infrastructure projects and loans to large manufacturers that have yet to be taken out, corporate borrowers as well as state-owned companies could try to find ways to change the rules. , say the bankers. A spokesperson for RBI did not respond to ET’s questions.