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PSU Bank shares like SBI, Canara, PNB fall amid new RBI norms for infra project financing
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
The central bank’s draft rules include a classification of the projects as per their phase and higher provisioning of up to 5% during the construction phase, even if the asset is standard.
Shares of India’s state-run lenders including State Bank of India, Punjab National Bank, Canara Bank, Union Bank of India, Maharashtra Bank, Bank of Baroda, tumbled up to 6% on Monday after the Reserve Bank of India (RBI) released a draft proposing tighter rules for lending and heightened monitoring for under-construction infrastructure projects.
The Nifty public sector undertaking (PSU) bank index, which has risen by an impressive 27% in 2024 so far, fell up to 5% in trade today.
All constituents of the PSU Bank index were trading in the red. The top laggards on the index were Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda, and Bank of India all slipping more than 3%.
All about the RBI proposal
The central bank’s draft rules include a classification of the projects as per their phase and higher provisioning of up to 5% during the construction phase, even if the asset is standard.
This is significantly higher than the current provision of 0.4% for non-default exposures.
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 include the project having a positive net operating cash flow that is sufficient to cover current repayment obligation to all lenders, and the total long-term debt of the project with the lenders has declined by about 20% from the outstanding at the time of achieving Date of Commencement of Commercial Operations, the RBI stated.
The central bank’s guidelines are proposed to be applicable on both banks as well as non-bank lenders.
Domestic brokerage house IIFL Securities in a note said that it estimates an additional provisioning requirement to be between 0.5% to 3% of the banks’ net worth and may hurt their CET-1 ratio by 7 basis points to 30 basis points.
The impact of RBI’s new guidelines was also seen on NBFCs such as PFC, REC and IREDA, shares of which declined 8%, 5% and 4%, respectively.
When it comes to non-bank lenders such as REC, PFC and IREDA, IIFL Securities expects no impact on their Return on Equity (RoE) but expects their tier-1 ratio to be hit by 200 basis points to 300 basis points and also potentially weigh on their valuation multiples.
“PSU banks index have recently witnessed a notable upside rally, marking a period of promising growth over the past few months. However, as the market dynamics shift, investors might anticipate a phase of consolidation or profit taking in the near term. This anticipated adjustment comes amidst the recognition that certain PSU bank stocks have become overvalued and overbought, signalling a cautious approach for investors,” said market expert Ravi Singh.
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