SBI changes Loan Rules, Customers will have to pay more for Loan

State Bank of India (SBI), the largest lender in the country, has introduced a new clause in its loan documents that allows it to transfer any increase in costs resulting from the implementation of proposed tighter provisioning regulations to the borrower. This move by SBI has sparked controversy within the industry, as many are lobbying against it. The clause specifically states that if there is a regulatory change requiring SBI to make higher provisions, the bank will pass on the cost to the borrower. This means that the bank can increase interest rates even after approving a loan at a particular rate.

Proposed Guidelines on Project Loans by the Reserve Bank of India

In early May, the Reserve Bank of India (RBI) issued comprehensive draft guidelines on financing and accounting of project loans. One key proposal is that banks should set aside 5% as provisions for infrastructure and commercial real estate projects that are under construction. This provision will gradually decrease after the project becomes operational. Currently, banks allocate 1% for commercial real estate loans, 0.75% for residential home projects, and 0.40% for all other loans, including project finance.

Banks and Companies Lobbying Against Proposed Norms

Banks, including SBI, and companies have approached the RBI to relax the proposed norms, arguing that they will negatively impact corporate interest in bidding for infrastructure projects. If the RBI does not relax the draft norms on project finance, SBI may need to make an additional provision of Rs 9,000 crore, which is 28% higher than the current provisions made for standard accounts, amounting to about Rs 32,000 crore.

SBI’s Explicit Mention of the Loan Clause and Implications

SBI’s explicit mention of the loan clause, even before the RBI issues the final guidelines, indicates that the bank does not anticipate any significant relaxation in the norms from the regulator. The RBI has asked banks to submit their suggestions before June 15, and the new guidelines will be implemented gradually starting from the end of March 2025.

Concerns Over Mispricing of Loans and Impact on Banks

The RBI’s decision to impose a 5% provision on existing and new loans aims to provide banks with a buffer to mitigate the risk of default during the construction phase of a project. The RBI is concerned that banks are mispricing loans by charging the same interest rate during and after construction, despite the higher risk during the construction period. In many cases, borrowers refinance their loans with other lenders after the construction phase is completed. Banks have expressed limited ability to pass on the impact of the proposed increase in provisions due to intense competition among lenders and the pressure to maintain relationships with large corporates.