RBI proposes tighter project financing rules for long term under construction projects

Today , Stocks of NBFC’s and Banks engaged in long term.project financing are down today reacting to the news of the RBI draft proposal seeking higher provisioning for under construction projects , even if the asset is a standard asset Class.
The initial provisioning of 5% can be reduced to 2.5% and then further to 1% on subsequent years as the project progress successfully.

While the draft seeks suggestions from all stake holders , i think it is good for the overall health of the financial system in the long term since it should not come as a surprise as a large chunk of money for provisioning all of a sudden in case of under construction projects becoming NPA at operational stage due to various reasons. In the short term during initial period , it may impact bottom line of NBFC & Banks to the extent of exposure to long term project financing, though the providing can be reversed back during subsequent years of the project continue to be standard asset without NPA.