The shares of public sector banks fell during trade on Monday after the Reserve Bank of India’s draft rules proposed higher provisioning norms on under-construction projects.
PSU Bank nifty index fell 3.66% to close at 7,252.85 in trade on Monday.
On 3 May, RBI issued a draft prudential framework for lenders undertaking project finance, which proposed an increase in standard asset provisioning to 1-5% of loans from the current 0.4% in a phased manner on project loans that are not overdue to stressed.
When a project is in the construction phase, lenders must set aside a provision of 5% of the loan amount, according to the draft rules. This will reduce to 2.5% once a project is operational and further to 1% once the project has adequate cash flow to repay obligations.
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 say that banks should have a clear viability on the date on which a project is expected to begin commercial operations and increase provisions in case operations are delayed. Any delay over 3 years in beginning an infrastructure project should change the classification of loan from standard to stressed.
RBI criteria
RBI has also laid down other criteria such as individual lenders in the consortium for projects with aggregate exposure upto ₹1,500 crore shall not have less than 10% exposure, and those lenders with higher aggregate exposure should have individual exposure of 5% or ₹150 crore, whichever is higher. The rules also make it mandatory for banks to ensure financial closure is achieved and date of commencement of commercial operations (DCCO) is documented prior to fund disbursement.
The draft guidelines are meant to safeguard the risks involved in project lending and to make higher prudential provisions, according to analysts. Suresh Ganapathy, banking analyst at Macquarie Capital believes that these rules will hit public sector banks more than private sector owing to their increased exposure.
“From financial companies’ perspective, we think this will have two implications: 1) provisioning requirements will go up for lenders affecting their profitability; and 2) these companies may ration credit to project finance, be more selective, and/or raise lending rates, further postponing the capex cycle recovery,” he said.
Analysts at IIFL Securities estimate that the impact of 5% standard asset provisioning will result in banks making additional provision of 0.5-3% of networth and a hit of 7-30 basis points on common equity tier 1 capital. Infrastructure focused NBFCs like REC, PFC and Ireda can see potential hit of 200-300bps to their capital ratio, they said.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it’s all here, just a click away! Login Now!
Download The Mint News App to get Daily Market Updates.
Published: 06 May 2024, 08:10 PM IST
