New RBI guidelines 'fail to mandate' environmental, socially equitable safeguards

By Amitanshu Verma, Kavita Kabeer*
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. The response recommends 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 CSOs propose the establishment of comprehensive oversight and redressal mechanisms within financial institutions to achieve full accountability regarding environmental, social, and climate issues.

The response underscores the need for mandatory public consultations and periodic social audits to ensure transparency in projects

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 states:

“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.”
The response believes 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 has been signed by the
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; Ashok Shrimali, Secretary General of Mines, minerals and People (mm&P) Alliance; Himanshu Thakkar, South Asia Network on Dams, Rivers, among others.
---
*With Centre for Financial Accountability

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