Impact of RBI's New Norms on Construction Project Costs

RBI has proposed a new norm for the projects which are under construction as a result the credit costs are expected to be increased.

The Credit costs are expected to be moderately increased for impacting the profitability as well as the losses of such accounts only if the Reserve Bank of India has proposed the provisioning norms for the projects which are under construction, these norms are implemented for such projects. The impact of such norms has led to incremental provisioning for the public banks that would be somewhere close to 0.2 percent and 0.1 percent on the private banks between the financial year 2025 and the financial year 2027 as per the report of Care Edge ratings.

The framework implemented by the Reserve Bank of India (RBI) might lead to the overlap with the expected credit loss (ECL) that is the framework required by the Reserve Bank of India. The Expected Credit Loss Framework involves the recognition of losses onto the loans of the bank as and when they were seen occurring, even if the person who has taken the loan has not been actually defaulted.

The senior director of Care Edge Sanjay Agarwal had mentioned that if the higher charges onto the existing stocks of the funded projects are to be made then additional provisioning would be added to the profit and loss account, the profits of the concerned banks are to be impacted by a rate of almost 11 percent into the public banks and 4 percent into the private banks in the last three years ended.

As per the reports the as long as the lenders are able to maintain asset quality, the provisioning of such are being expected to reasonably strengthen the balance sheet of the lenders. As the provisions are getting higher during the initial project periods it would get reversed after the projects gets completed. Moreover Cash flows are also being generated as it was originally scheduled. There are possibilities that the implementation of such frameworks by the Reserve bank of India would lead to the overlap with the expected credit loss framework that was previously required by the RBI.

The new norms were introduced by the Reserve Bank of India for the under construction projects as the credit costs would be increased as such but the credit costs were increased very moderately which has directly impacted the Profitability as well as losses of the various accounts. The norms had impacted in such a way that the incremental provisioning was also increased for both the private as well public banks.

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