The Reserve Bank of India (RBI)’s recent proposal for heightened provisioning requirements on infrastructure lending has sparked concerns among industry experts, with forecasts suggesting potential profitability impacts on banks, particularly public-sector entities.
The draft guidelines, unveiled on May 3, mandate increased provisions for all ongoing infrastructure projects, coupled with stringent monitoring measures to mitigate emerging stress. Analysts predict that the proposed provisions, if implemented, could exert significant pressure on bank profitability. Macquarie, in a recent note, highlighted the likelihood of elevated provisioning requirements impacting lenders’ bottom lines. This could prompt banks to exercise caution in extending credit for project finance, potentially leading to a more selective approach or even necessitating an upward adjustment in lending rates, thus potentially delaying the capital expenditure cycle recovery. Public sector banks are anticipated to bear the brunt of these regulations, given their higher exposure to infrastructure loans compared to private counterparts. Kotak Institutional Equities’ report underscores this discrepancy, noting public banks’ heavier reliance on infrastructure lending vis-Ã -vis commercial real estate. Conversely, private banks’ exposure tends to revolve around financing operational assets rather than funding projects in the construction phase.
The market has already responded to the RBI’s draft circular, with PSU bank stocks experiencing a notable downturn. The Nifty PSU Bank index witnessed a decline of approximately 3.2 per cent on May 6, with prominent names like Punjab National Bank, Canara Bank, Bank of Baroda, and Union Bank registering declines exceeding four per cent. Additionally, non-banking financial companies (NBFCs) specialising in power project financing, such as REC, Power Finance, and IREDA, suffered significant losses, with declines reaching up to 12 per cent.
Under the proposed norms, lenders would be required to set aside provisions equivalent to five per cent of the loan amount during the construction phase of a project, subsequently reducing to 2.5 per cent upon project completion and further to one per cent once sufficient cash flow for debt repayment is established. The phased implementation of these provisions, with incremental increases over the fiscal years, aims to ensure gradual adaptation by financial institutions. RBI emphasises the importance of lenders maintaining vigilance over project timelines and promptly identifying any signs of stress. Projects encountering delays exceeding three years in commencing operations would trigger a reclassification of loan statuses, shifting from standard to stressed. Strict monitoring mechanisms are thus prescribed to proactively address emerging challenges in the infrastructure financing landscape.
