Significance of RBI’s Draft Prudential Framework on Income Recognition, Asset Classification, and Provisioning for Advances in HAM Projects

Implications of RBI’s Draft Guidelines on HAM Projects: A Critical Analysis

The Reserve Bank of India’s (RBI) draft prudential framework for project loans has sparked a wave of criticism and concern among industry players. The draft guidelines, released on May 3, 2024, aim to address risks associated with project financing but have been met with skepticism and pushback.

One of the key provisions in the draft guidelines is a significant increase in provisioning requirements for under development projects. RBI has proposed that regulated entities must provision 5% of their funded outstandings against all existing and new exposures, a sharp increase from the current 0.4% requirement. This could have a major impact on projects, especially those following the Hybrid-Annuity Model (HAM).

The draft guidelines also propose changes such as making land availability a pre-sanction condition, limiting moratorium periods, and imposing restrictions on loan tenors. These measures could potentially delay financial closure for HAM projects and require developers to inject additional capital to align cash flows with project schedules.

While there is some relief in the exclusion of Infrastructure Investment Trusts (InVITs) from the guidelines, industry experts are calling for a reevaluation of the proposed framework. The potential implications on HAM projects, which have gained popularity for their stable cash flows, are a cause for concern.

Overall, the industry-wide outcry against the draft guidelines raises questions about their efficacy and impact on the economy. As stakeholders continue to voice their concerns, it remains to be seen how RBI will address the feedback and potentially revise the framework to better suit the needs of the industry.

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