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Shares of India's state-run lenders, including State Bank of India, Punjab National Bank, Canara Bank, Union Bank of India, Maharashtra Bank, and Bank of Baroda, witnessed a significant decline of up to 6% on Monday following the Reserve Bank of India's (RBI) release of a draft proposing stricter rules for lending and enhanced monitoring for under-construction infrastructure projects.
The Nifty public sector undertaking (PSU) bank index, which had recorded an impressive 27% rise in 2024, fell by up to 5% during Monday's trading session. All constituents of the PSU Bank index traded in the red, with Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda, and Bank of India being among the top laggards, each experiencing a drop of more than 3%.
The central bank's draft regulations include categorizing projects based on their phase and imposing higher provisioning of up to 5% during the construction phase, even if the asset is classified as standard. This represents a significant increase from the current provision of 0.4% for non-default exposures.
Once a project enters the 'Operational phase,' provisions can be reduced to 2.5% of the funded outstanding and further down to 1% if specific conditions are met. These conditions include the project generating a positive net operating cash flow sufficient to cover current repayment obligations to all lenders and a reduction in the project's total long-term debt with the lenders by approximately 20% from the outstanding amount at the time of achieving the Date of Commencement of Commercial Operations, as stated by the RBI.
The proposed guidelines are intended to apply to both banks and non-bank lenders. Domestic brokerage house IIFL Securities estimates that the additional provisioning requirement could range from 0.5% to 3% of the banks' net worth, potentially reducing their CET-1 ratio by 7 basis points to 30 basis points.
The impact of RBI's new guidelines was also evident in the decline of shares of NBFCs such as PFC, REC, and IREDA, which fell by 8%, 5%, and 4%, respectively. IIFL Securities anticipates no impact on the Return on Equity (RoE) of non-bank lenders like REC, PFC, and IREDA, but it expects their tier-1 ratio to be affected by 200 basis points to 300 basis points, potentially weighing on their valuation multiples.
Source: PSU Bank shares like SBI, Canara, PNB fall amid new RBI norms for infra project financing