The credit committee discussed the possibility of inserting a new clause in the lender’s loan document which would state that for any regulatory change requiring SBI to make higher provisions, the bank will pass on the cost to the borrower, said the people cited above.
The discussions were in anticipation that the Reserve Bank of India (RBI) will not do a full U-turn on the draft guidelines that may be issued later this year.
Early May, the RBI issued comprehensive draft guidelines on financing and accounting of project loans which requires banks to set aside 5% as provisions on infrastructure and commercial real estate that are under construction. This provision will come down gradually after the project is operational.
If the clause is inserted, it would give the bank the right to raise rates even after sanctioning a loan at a particular interest rate.
Currently, banks provide 1% for commercial real estate loans, 0.75% for residential home projects, and 0.40% for all other loans, including project finance.
Banks, including SBI, and companies have approached RBI to relax the proposed norms, which they say will dent corporate appetite to bid for infrastructure projects.
“The idea to insert a clause with explicit mention of passing it on to the borrower is in line with RBI’s strict stance of making loan documents transparent,” said one of the persons cited above. Secondly, when the regulator increases provisioning norms so sharply, it expects banks to pass them to the borrower, otherwise the purpose of raising the provision is defeated, he added.
Senior SBI officials, however, said that the bank has not taken any policy decision on passing the provision to borrowers as yet.
SBI, the third-largest bank in terms of market capitalisation, will need to make an additional provision of ?9,000 crore if RBI does not relax the draft norms on project finance, one of the persons cited above said. This is 28% higher than the current provisions — at about ?32,000 crore — made for accounts that are standard.
Most banks have a clause in the loan agreement that states they have the right to change the terms of the loans in line with the amendments in the regulations by RBI. However, in rare instances, banks have exercised their right to revise interest rates mid-way through projects.
RBI has asked to give their suggestions before June 15, and the new guidelines will be effective — in a step-up manner —from the end of March 2025.
The bank has not sanctioned any new loans for projects under construction since the day RBI issued draft norms, but it expects new demand for such loans from the third quarter.
RBI’s decision to impose a 5% provision on existing and new loans partly ensures that banks have a buffer to help them overcome the risk of default, if any, during the construction period of a project. The higher provision also ensures that only serious players are in the business.
Most banks have conveyed to the RBI that they will have limited ability to pass on the impact of the proposed increase in provisions due to the intense competition among lenders and pressure to maintain relationships with large corporates.
The RBI is concerned that banks are mispricing loans by charging the same interest rate during and after construction, even though the risk is higher during construction. In most cases, after construction, most borrowers get their loans refinanced from other lenders.
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