Nifty PSU Bank index rose 2.5 percent on May 8 over optimism surrounding the sector as reports suggested that the public lenders are likely to oppose Reserve Bank of India's proposed guidelines on imposition of higher provisions for under-construction projects.
On May 3, RBI proposed that lenders should set aside higher provisions for all infrastructure projects that are under-construction, and also asked the lenders to ensure strict monitoring of any emerging stress.
Public-sector lenders are disproportionally impacted since public banks have a higher exposure to infrastructure loans.
At 1.30 pm, the Nifty PSU Bank index was hovering around the 7,250 level, higher by about 2.3 percent.
The top gainer on the index was Indian Bank, zooming three percent, followed by Canara Bank, Punjab National Bank and Indian Overseas Bank.
"The sizzle in PSU banks in today's trading session comes after recent correction. In an expensive market, PSU banks valuations are still at comfortable levels, hence investors' faith is reinstated," said VK Vijayakumar, Chief Investment Strategist at Geojit Services.
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What has the RBI proposed?
When a project is in the construction phase, the RBI proposed that lenders should set aside a provision of five percent of the loan amount. This will be reduced to 2.5 percent once a project is operational.
The required provisions will further be cut to one percent once the project has adequate cash flow to repay current obligations.
The lenders are required to make the five percent provision in a phased manner: two percent in FY25, 3.5 percent in FY26 and five percent by FY27.
Currently, lenders are required to have a provision of 0.4 percent on project loans that are not overdue or stressed.
The issue is likely to be discussed within the Indian Banks Association (IBA), which would send its inputs to RBI. The proposed rules can be altered based on feedback received till June 15, 2024.
Analysts at Macquarie said that the project finance heads view RBI's proposed norms to be quite 'onerous' and, if implemented, they can dampen recovery in project finance or capex cycle.
JM Financial said the move will lead to lower returns for lenders in project finance and reduce the incremental appetite for such exposures, if the guidelines are implemented in the current form.
It is a prudent move from the risk management perspective, but it could be detrimental to growth in the infrastructure sector as it is capital-intensive.
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