RBI, banks discusses setting up a company for project monitoring

The Reserve Bank of India (RBI) and banks are discussing a proposal to float a company for independent project appraisal and monitoring of big-ticket infrastructure and industrial projects. This is part of RBI’s efforts to improve risk management, contain delays and reduce risks for projects becoming bad loans.

Indian banking system has extended financial and non-financial assistance to large number of infrastructure and core-sector manufacturing projects over the past few decades. The proportion of public-sector banks’ exposure to the infrastructure sector has ballooned from three per cent to around 15 per cent of total advances over the past 10 years.

At present, agencies such as SBI Capital Markets and IDBI Capital Markets that are active in project finance related work — evaluation, vetting and monitoring — are engaged by the clients. They may not be in a position to evaluate fully the risks from the lender’s perspective.

According public-sector executives, the proposal is at a discussion stage. Currently, a number of projects funded by the banking sector experience stress due to various factors, including slowdown in the economy.

The existing mechanism for project monitoring has been found to be less than satisfactory, often leading to delays in preventive as well as remedial actions for stressed assets. Hence, there is an urgent need for an agency specifically mandated for evaluating projects before bank funds are committed, says the draft proposal.

  The proposed firm will be promoted jointly by public-sector banks, financial institutions, and select private-sector companies. The shareholding of public-sector banks and financial institutions will be restricted to a maximum of 49 per cent.                     

The remaining will be held by private-sector entities. The initial capital of the company could be between Rs 50 crore and Rs 100 crore. The quantum of a single entity’s participation in the company is proposed to be restricted to a maximum of 15 per cent, to retain its arm’s-length character. The core functions of project evaluation, vetting and project monitoring would be driven by sector heads and supported by experienced manpower. These professionals and experts could be on the rolls of the company or engaged on a retainership basis. Former RBI Governor Raghuram Rajan had said in August 2016 that India would have enormous project financing needs in the coming days.

“What is in the pipeline is truly enormous – airports, railway lines, power plants, roads, manufacturing plants, etc. Bankers will remember the period of irrational exuberance in 2007-2008 when they lent without asking too many questions. I am hopeful that this time, it will be different.”