MUMBAI: Shares of the state-owned banks and project financers plunged on Monday, days after the Reserve Bank of India (RBI) proposed to tighten the project financing norms, which require lenders to set aside higher capital for doling out loans to under-construction projects. Shares of Power Finance Corporation (PFC) and REC fell the most at 9 per cent and 7.5 per cent, respectively.
The Nifty PSU Bank index slumped 3.7 per cent with Punjab National Bank (PNB) leading the fall at 6.4 per cent. Canara Bank and Bank of Baroda were other major losers. Top lender State Bank of India (SBI) fell nearly 3 per cent.
The RBI on Friday released a draft circular on project financing in a bid to strengthen balance sheets. Under the proposed norms, lenders will have to make provisions of up to 5 per cent of the outstanding exposures under construction projects. This would reduce to 2.5 per cent once the asset was operational. It would decline further to 1 per cent when 20 per cent of the loans are repaid and the project has the adequate cash flow to repay current obligations.
The circular covers not just project financing but also commercial real estate financing for all lenders. More importantly, the guidelines are to be applicable immediately and will include the current outstanding exposure.
Analysts said the provisioning norms are multi-fold of what lenders currently provide for. As a result, the norms, if implemented, will hit profitability and could also impact capex growth as lenders will become more hesitant to lend, said experts.
“From financial companies’ perspective, we think this will have two implications — provisioning requirements will go up for lenders affecting their profitability; and these companies may ration credit to project finance, be more selective, and/or raise lending rates, further postponing the capex cycle recovery,” said Macquarie analysts Suresh Ganapathy and Punit Bahlani in a note.
“Making the provisions from the point of creating the asset or loan should be looked at as an extension of standard asset provisions. While there is a RoE (return on equity) impact in the short term, it would be compensated through a higher valuation multiple. Overall, we would need to be prepared for more provisions,” added analysts at Kotak Institutional Equities.
Analysts said the impact would be somewhat mitigated as lenders would have to make the provisions of 5 per cent in a phased manner (2 per cent in FY25, 3.5 per cent by FY26 and 5 per cent by FY27).
“The current standard asset provisioning is 40 basis points (bps) on all classes of standard project loans. This jumps to 5 per cent for under-construction projects and comes down slowly to 1 per cent for fully operational positive FCF (free cash flow) projects, though still higher than the 40 bps that banks currently carry. There are timelines prescribed by the RBI and hence the impact will not be immediate on the P&L of banks and NBFCs, though this impact will be staggered,” the Macquarie note added.
Analysts said the higher provisioning will hit the common equity Tier-I (CET1) of lenders, particularly infra-focused project financers such as PFC and REC.
“Impact of higher standard asset provisioning norms for banks: Estimate additional provision requirement of 0.5-3 per cent of net worth, and CET1 ratio hit of 7-30 bps (higher for PSU banks). For NBFCs, additional provisions will not be routed through P&L, but instead will be apportioned to the impairment reserve. Therefore, NBFCs shall not have a RoE impact, but infra-focused NBFCs can see a potential hit of 200-300 bps to their capital ratio. Valuation of these NBFCs can also be potentially impacted as the adjusted net worth will be 8-13 per cent lower,” said a note by IIFL.
Shares of the Indian Renewable Energy Development Agency (IREDA) fell 4 per cent.
“Ireda is likely to face limited impact, given our alignment with higher provisioning standards that ensure resilience to these additional norms…Profit After Tax (PAT) is expected to be largely unaffected, while there may be marginal impacts on Net Worth and Capital Adequacy Ratio (CRAR). However, with our currently healthy CRAR levels, any marginal impact can be accommodated accordingly,” said Kumar Das CMD, Ireda.
Source: Business Standard
