New Delhi: The RBI must sufficiently examine the reasons for cost overruns and non-performance in its project financing framework, a group of civil society organisations, academics and social workers said in response to the central bank’s draft framework released last month.
They added that the RBI needs to integrate mandatory climate risk assessments and sustainable practices into the draft framework, saying current guidelines “fall short in mandating robust environmental, social and climate safeguards at the level of financial institutions”.
On May 3, the RBI released its draft framework for lenders to infrastructure and commercial real estate projects. It invited responses to the framework until Saturday (June 15).
The group of respondents said the gap in examining the reasons for overruns and non-performance was “particularly evident in major infrastructure and energy projects that have faced significant cost overruns and fallen into non-performing asset status”.
They also recommended the framework revisit involving commercial banks in project financing, arguing that development finance institutions (DFIs) were better equipped to finance large-scale infrastructure projects.
“DFIs possess the necessary expertise and risk mitigation tools to manage the substantial risks associated with these projects, which include construction, operational, market and political risks,” they said in a press note.
They also proposed compulsory public consultations, social audits as well as oversight and redressal mechanisms within financial institutions in the interests of transparency and accountability.
Their press note, which summarises their response to the RBI, is reproduced in full at the end of this article.
Others have also responded to the draft framework. Reuters reported citing sources that the Indian Banks’ Association planned to ask the RBI not to change the amount of money lenders need to provision, or set aside, for projects during their construction phase.
The bank said lenders will have to set aside 5% of the loan for an under-construction project – up from 0.4% currently – to compensate for potential losses, according to a reading of the framework and reports by Reuters and The Hindu.
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Make Project Finance Accountable and Sustainable! CSOs, Researchers, Collectives Urge RBI
In a comprehensive and detailed response to the Reserve Bank of India’s recently released Draft Prudential Framework for Income Recognition, Asset Classification, and Provisioning (IRACP-PUIMP) pertaining to Advances – Projects Under Implementation Directions 2024, civil society and community organisations, academics and social workers have highlighted several critical areas of concern and proposed significant enhancements to the framework. The draft prudential framework released by the central regulator had invited public comments till June 15, 2024.
The response emphasises the framework’s inadequate examination of cost overruns and project non-performance. By not sufficiently analysing the causes of these issues, the framework misses an opportunity to create more effective resolution plans based on past learnings. This gap is particularly evident in major infrastructure and energy projects that have faced significant cost overruns and fallen into non-performing asset (NPA) status.
Another key aspect of the response is the role of commercial banks in project finance. We recommend revisiting this involvement, emphasising that Development Finance Institutions (DFIs) are better suited to handle large-scale infrastructure projects. DFIs possess the necessary expertise and risk mitigation tools to manage the substantial risks associated with these projects, which include construction, operational, market, and political risks.
Furthermore, the current guidelines fall short in mandating robust environmental, social, and climate safeguards at the level of financial institutions. Civil society organisations (CSOs) advocate for mandatory climate risk assessments and sustainable practices to be integrated into the project finance framework. This integration is crucial for mitigating long-term environmental impacts and ensuring that financed projects do not adversely affect vulnerable communities.
The response also underscores the need for mandatory public consultations and periodic social audits to ensure transparency and community involvement in projects. These measures are essential for safeguarding the interests of local populations and ensuring equitable development.
Additionally, the CSO’s propose the establishment of comprehensive oversight and redressal mechanisms within financial institutions to achieve full accountability regarding environmental, social, and climate issues. A permanent body within each institution should ensure compliance with these standards throughout all project stages, from pre-approval to loan closure.
The collective submission], stated, “The new prudential framework is a pivotal step towards financial stability in project finance. However, it must evolve to address the environmental, social, and governance aspects critical to sustainable development. Our recommendations aim to ensure that the framework not only safeguards financial interests but also upholds the broader public good.”
We believe that these enhancements will significantly strengthen the framework, ensuring that project finance in India is not only economically viable but also socially equitable and environmentally sustainable.
The submission was signed by the following:
- Centre for Financial Accountability, New Delhi
- Bharat Patel, Machimar Adhikar Sangharsh Samiti
- Krishnakant, Paryavaran Suraksha Samiti
- Dinesh Abrol, Professor, Institute for Studies in Industrial Development, New Delhi
- Roma Malik, All India Union of Forest Working People
- Dr Himanshu Upadhyaya, Assistant Professor, Azim Premji University, Bengaluru
- Monica Harpalani, Independent Researcher
- Raj Kumar Sinha, Bargi Bandh Visthapit Evam Parbhavit Sangh, Madhya Pradesh
- Ravi Rebapraggada, Samata and Mines, Minerals and People
- Ashok Shrimali, Secretary General of Mines, minerals and People (mm&P) Alliance
- FOCUS on the Global South
- Himanshu Thakkar, South Asia Network on Dams, Rivers and People
- Financial Accountability Network India
For further details, please contact:
Amitanshu Verma, amitanshu@cenfa.org
Kavita Kabeer, kavita@cenfa.org
Email: info@cenfa.org
Phone: +91-11-49123696
About:
Centre for Financial Accountability, New Delhi, is committed to fostering sustainable development through responsible financing practices. Our mission is to promote transparency, accountability, and inclusive growth in the financial sector. The CFA aims to strengthen and improve financial accountability within India. CFA engages in critical analysis, monitoring and critique of the role of financial institutions – national and international, and their impact on development, human rights and the environment, amongst other areas.
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