RBI will make provision rules stricter! PSU banks and firms giving loans to infrastructure will be affected.
Under the proposed rules, lenders will have to make a provision of up to 5 percent on the outstanding loans given to under-construction projects.
Shares of government-owned banks and project lending firms fell on Monday after the Reserve Bank of India (RBI) proposed tightening rules governing project financing.
Under this, lenders will have to set aside more capital to give loans to under-construction projects. Shares of Power Finance Corporation (PFC) and REC fell 9 percent and 7.5 percent respectively.
Meanwhile, the Nifty PSU Bank index fell 3.7 percent while PNB shares fell 6.4 percent. Shares of Canara Bank and Bank of Baroda also remained in the loss. State Bank of India shares fell by about 3 percent. The RBI on Friday released a draft on providing funds to projects so that their balance sheets can be strengthened.
Under the proposed rules, lenders will have to make a provision of up to 5 percent on the outstanding loans given to under-construction projects. When that asset becomes operational, it will be reduced to 2.5 percent. This will be further reduced to one percent when 20 percent of the loan is repaid and the project has sufficient cash inflows to service the existing liabilities.
This circular covers not only project financing but also commercial real estate financing for all lenders. More importantly, the guidelines will be applicable immediately and will also cover existing outstanding loans.
Analysts said that under the new rule, creditors will have to make provisions many times higher than the existing provisions. As a result, if these rules are implemented, their profits will be hit and capital expenditure growth may also be affected as creditors will now be more hesitant to lend.
Macquarie analysts Suresh Ganapathy and Puneet Bahlani said in a note that from the financial companies' perspective, we think this will have two impacts - increased provisioning requirements will impact the profits of creditors and these companies may limit the financing of projects. Are. They will also give loans to selected projects, increase interest rates, and stop the improvement in the capital expenditure cycle.
Analysts at Kotak Institutional Equities said the provision on the creation of an asset or loan appears to be an extension of the standard asset provisions. Returns on equity will be affected in the short term, which will be compensated by higher valuation multiples. Overall, we will need to be prepared for more provisions.
Analysts said this impact will be mitigated to some extent as creditors will have to make provisions of up to 5 percent in a phased manner i.e. 2 percent in FY 2025, 3.5 percent in FY 2026, and 5 percent in FY 2027. Macquarie's note said the current standard asset provision is 40 basis points on debt for standard projects across all categories.
Follow our Whatsapp Channel for latest update