Infra lending norms should raise spending closer to the government target
Banks were worried when the RBI first released the draft guidelines in May 2024, advocating the provisioning of 5 percent during the project's construction phase, 2.5 percent during the operational phase, and further down to 1 percent once the project starts generating sufficient cash flows. The Indian Banking Association is reported to have appealed against the proposed norms, suggesting instead an initial provisioning of 1-2 percent, a modest increase over the existing 0.4 percent. Heeding to their concerns, the RBI offered a relief keeping the provisioning requirement to 1 percent, which should aid in meaningfully improving the lending and borrowing appetite.
Following the pile-up of bad loans that resulted in a twin balance sheet problem, India's infrastructure sector has been grappling with massive delays and cost overruns. According to official data, about 800 out of the Union government's 1,800 ongoing projects valued at over ₹150 crore each were behind schedule in April 2024. Notwithstanding the efforts, infrastructure expenditure remains far below the required rate of ₹20 lakh crore a year under the National Infrastructure Pipeline. To succeed as the world's third largest economy, we need collective efforts between the government, private sector and financial institutions to carefully execute infrastructure projects, which are often complex and have long gestation periods. Infrastructure is one of the key pillars of economic growth and essential for mass job creation, besides boosting the manufacturing sector. The government should also undertake reforms to prevent project delays and facilitate access to credit.
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