PSU bank stocks take a hit due to draft RBI norms

Shares of public sector banks fell in trade on Monday after the Reserve Bank of India’s draft rules proposed higher provisioning norms on under-construction projects. The PSU Bank Nifty index closed 3.66% lower at 7,252.85 in Monday’s trade.

On May 3, the RBI released a draft prudential framework for lenders doing project finance, proposing to increase the standard asset provisioning from the existing 0.4% to 1-5% in a phased manner on project loans that are stressed. Are not.

According to the draft rules, when a project is in the construction stage, lenders will have to set aside a provision of 5% of the loan amount. This will reduce to 2.5% once the project is operational and 1% when the project has sufficient cash flow to service the liabilities.

RBI has allowed lenders three years to reach 5% provisioning – 2% in FY25, 3.5% in FY26 and 5% by FY27.

The draft rules also state that banks should have clear feasibility of the date on which commercial operations of a project are expected to commence and should increase provisions in case of delays in operations. Delay of more than 3 years in starting the infrastructure project should change the classification of the loan from standard to stressed.

RBI norms

RBI has also set other norms such as individual lenders should not have less than 10% exposure in the consortium for projects with total exposure up to ₹1,500 crore, and lenders with higher total exposure should have 5% or ₹150 crore. There must be individual exposure. , whichever is higher. The rules also make it mandatory for banks to ensure that financial closure is achieved and the date of commencement of commercial operations (DCCO) is documented before fund disbursement.

According to analysts, the draft guidelines are meant to safeguard the risks involved in project loans and make higher prudential provisions. Suresh Ganapathy, banking analyst at Macquarie Capital, believes that these rules will impact public sector banks more than the private sector due to their increased risk.

“From the perspective of finance companies, we think this will have two implications: 1) provisioning requirements for lenders will increase, impacting their profitability; and 2) these companies may be rationing credit for project finance, more may be selective, and/or raise lending rates, further postponing the recovery of the capital expenditure cycle,” he said.

Analysts at IIFL Securities estimate that the impact of 5% standard asset provisioning will result in banks making additional provisions of 0.5-3% of net worth and an impact of 7-30 basis points on common equity tier 1 capital. He said infrastructure-focused NBFCs like REC, PFC and IREDA could see a potential decline of 200-300 bps in their capital ratios.