Banking stocks HDFC Bank, ICICI Bank, State Bank of India (SBI), Punjab National Bank, among others have slipped as much as 9 percent in the past 3 days after the Reserve Bank of India (RBI) proposed norms to tighten project financing by setting standard asset provisioning of up to 5 percent on loans.
However, reports suggested that the lenders are likely to oppose imposition of higher provisions for under-construction projects. 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.
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"We believe that banks would significantly scale back project finance credit if these new measures are implemented. In the interim, banks are expected to carry 2.5-5 percent of loan amount as provisioning. Though the RBI rules state that around 1 percent of provisioning can only take place after 20 percent of debt repayment, it usually takes 6-7 years to achieve that 20 percent of debt repayment," said Macquarie analysts.
The RBI proposed that banks should set aside a provision of 5 percent of loan amount for projects at construction phase. This can be reduced to 2.5 percent when the project becomes operational, and later to 1 percent when a certain level of cash flow is attained and 20 percent of debt is repaid.
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If implemented, these new norms will present funding challenges for both under-construction and operational infrastructure projects, said Rajashree Murkute, Senior Director at CareEdge Ratings. Moreover, the mandate to reduce debt by 20 percent to lower provisioning could delay the realisation of interest rate benefits for such operational projects, despite an enhanced credit profile, she added.
At present, the standard asset provisioning is 0.4 percent for project finance. JM Financial predicted that if the new guidelines were implemented, the incremental credit costs for public sector banks would increase in the range of 12-21 basis points as they carry higher exposure to infrastructure loans compared to private banks.
The government is still in process to firm up these new rules but analysts believe that these rules, if implemented can deter such lending and dampen capex pick-up in the economy.
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