Public Sector Banks and State Financial Institutions Under Pressure
Shares of public sector banks (PSBs) and state financial institutions faced pressure on Monday, experiencing a decline of up to 9% on the BSE during intraday trade. This drop was attributed to profit booking following the Reserve Bank of India's (RBI) proposal for stricter regulations governing lending to projects under implementation.
Power Finance Corporation (PFC) and REC witnessed the most significant decline, with their shares falling by 9% and 7%, respectively. However, despite this drop, both companies have seen a substantial increase in their share prices over the past six months, with a 70% surge.
Other PSU financials, including Punjab National Bank, Bank of Baroda, Canara Bank, Bank of India, State Bank of India, Union Bank of India, and UCO Bank, also experienced a decline, ranging from 2% to 5%. In contrast, the S&P BSE Sensex witnessed a 0.5% increase at 09:29 AM.
The RBI's proposed guidelines aim to establish a minimum exposure for banks' loan involvement in project finance for consortium lending and mandate a 5% standard asset during the construction phase. This move is expected to lead to a significant increase in provisioning requirements, potentially resulting in lower returns for lenders in project finance and reducing their appetite for such exposures.
Analysts at JM Financial Institutional Securities believe these proposed norms could have a detrimental impact on the growth of capital-intensive infrastructure sectors in the economy. However, analysts at CLSA feel that the impact on PFC's and REC's profit and loss will be minimal, although the proposed norms might put a strain on their capital adequacy.
The draft guidelines are applicable to all lenders, but non-bank finance companies (NBFCs) follow IndAs accounting. Under existing rules, the difference in provision requirements between RBI rules and IndAs will have to be adjusted via impairment reserves.
Lenders are now required to maintain minimum exposure in a consortium and can only sell their exposure after the construction phase is complete. This, along with higher provision requirements, could act as a deterrent for lenders.
Overall, the proposed stricter regulations by the RBI have created uncertainty and pressure on PSBs and state financial institutions, potentially impacting their lending activities and profitability in the project finance segment.