The Reserve Bank of India’s (RBI) latest draft guidelines propose increased provisioning for ongoing infrastructure projects, potentially affecting India’s capital expenditure momentum. Banks fear higher provisions could elevate interest rates, delay projects, and stress loans, impeding the Modi government’s capex drive. Despite historical loan default trends, RBI’s rationale for these stringent measures remains unclear.

India aims to achieve 60% of its capex target by September to curb inflation. RBI’s move might hinder this goal, as banks express concerns over the impact on ongoing projects. The Modi government’s focus on infrastructure has been a key economic driver, with significant investments in capital projects. However, RBI’s proposed norms could dampen private sector activity and project financing.

Banks argue that increased provisions could escalate costs, leading to project delays and stressed loans. The Modi government’s capex drive was instrumental in revitalizing India’s private sector, which has experienced subdued growth in recent years. India Ratings notes a potential uptick in private sector capex, but RBI’s draft norms could temper expectations and bidding appetite among infrastructure developers.

RBI’s proposal to raise provisions sharply has drawn skepticism from bankers, who question the necessity given lower fresh slippages compared to recoveries. Historical trends show a surge in non-performing loans in the infrastructure sector post-2012, prompting caution among lenders. RBI’s proactive stance aims to mitigate risks amid India’s infrastructure push.

Under RBI’s proposed guidelines, banks would need to set aside 5% of the loan amount for projects under construction, with rates decreasing as projects progress. The central bank emphasizes ongoing monitoring of project stress and early resolution planning. While these measures aim to strengthen financial stability, their potential impact on India’s capex trajectory remains a subject of debate.

In conclusion, RBI’s draft guidelines on infrastructure project provisioning reflect a cautious approach amid India’s ambitious capex drive. While intended to mitigate risks and ensure financial stability, these measures may pose challenges for ongoing projects and private sector investment. Balancing the need for prudence with the imperative of economic growth will be crucial in navigating this policy landscape.

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