PSU bank shares take a hit due to draft RBI norms on project finance

livemint.com:

RBI issued a draft prudential framework for lenders undertaking project finance, which proposed an increase in standard asset provisioning to 1-5% of loans from the current 0.4% in a phased manner on project loans that are not overdue to stressed. When a project is in the construction phase, lenders must set aside a provision of 5% of the loan amount, according to the draft rules.

This will reduce to 2.5% once a project is operational and further to 1% once the project has adequate cash flow to repay obligations. RBI has allowed lenders three years to reach 5% provisioning—2% in FY25, 3.5% in FY26 and 5% by FY27.

The draft rules also say that banks should have a clear viability on the date on which a project is expected to begin commercial operations and increase provisions in case operations are delayed. Any delay over 3 years in beginning an infrastructure project should change the classification of loan from standard to stressed.

RBI has also laid down other criteria such as individual lenders in the consortium for projects with aggregate exposure upto ₹1,500 crore shall not have less than 10% exposure, and those lenders with higher aggregate exposure should have individual exposure of 5% or ₹150 crore, whichever is higher. The rules also make it mandatory for banks to ensure financial closure is achieved and date of commencement of commercial operations (DCCO) is documented prior to fund disbursement.

The draft guidelines are meant to safeguard the risks involved in project lending and to make higher prudential provisions, according to analysts. Suresh Ganapathy, banking analyst at Macquarie Capital believes that these rules will hit public sector banks more than private sector owing to their increased exposure.