Tightening of project finance norms by the Reserve Bank of India (RBI) will increase the incremental credit cost for banks and hurt their Common Equity Tier-1 (CET1) ratios. According to analysts, the incremental credit cost for banks may go up by 6-21 basis points and hurt the CET1 ratios by 7-30 bps.
“While this is prudent from a risk management perspective, coming from the regulator’s experience in the last credit cycle, we believe this can be detrimental to growth in the capital intensive infrastructure sectors in the economy,” said Sameer Bhise, banking analyst, JM Financial Institutional Securities, in a report. For PSBs, the incremental credit costs are expected in the range of 12- 21bps,” he said.
Terming it as a significant increase in provisioning requirement, he added that this will result in lower returns for lenders in project finance and reduce incremental appetite for such exposures, if these norms are implemented in current form. Shares of public sector banks, which have a higher exposure to infrastructure loans, plunged by upto 6% on BSE reacting to the RBI’s draft norms. Share of Punjab National Bank plunged 6%, Canara Bank fell 5%, Bank of Baroda declined 3.7% and Union Bank fell 3%. SBI shares declined by 2.8% and Bank of Maharashtra fell by 2%. Under the proposed norms, a bank has to set aside 5% of the exposure during the construction phase, which goes down as the project becomes operational. Once the project reaches the ‘operational phase’, the provisions can be reduced to 2.5% of the funded outstanding and then further down to 1% if certain conditions are met. These guidelines are applicable to all commercial banks, including small finance banks and NBFCs.
The impact of higher provisioning CET 1 ratio is expected to be 20-30 bps for public sector banks while for private banks, the impact is likely to be only a modest 7-13bps, according to IIFL Securities.Analysts say that these norms will be applicable on retrospective effect and will cover existing loans of the lenders.
“While every objective of the regulator is to strengthen the balance sheet of banks and make counter cyclical buffers when the health of the sector is the best seen in the last decade or so…what is surprising is how draconian these rules are,” Suresh Ganapathy, head of Macquarie Capital’s financial research, said in a note. “At a time when the government is expecting private capex to pick up – tell me which banks will lend now when provisioning for under-construction projects shoots up from 40 bps to 500 bps. And these rules are applicable on retrospective basis,” he added.
“Provision is highest during the construction phase because the risk is seen more at this stage of infra projects,” a senior official of a public sector bank told FE.
