Worries build up over RBI
strictures on infra financing
Shares
of state-owned banks, non-banking finance companies (NBFCs) and infrastructure
firms plunged as much as 10% on Monday following the Reserve Bank of India's
tougher draft guidelines on the financing and accounting of project loans.
The
proposed stricter lending criteria, with additional provisioning, are aimed at
preventing accounting shocks but could potentially hurt balance sheets of these
entities and exert pressure on their valuation multiples, analysts and
economists said.
The
Nifty PSU Bank index fell 3.66%, while the Nifty PSE index dropped 2.79% and
the BSE Infrastructure index declined 2.28%. Investors saw a staggering erosion
of ₹1.83 lakh crore in wealth from public sector stocks on Monday.
While
the planned measures are prudent from a risk-management perspective stemming
from the regulator's experience in the previous credit cycle - analysts said
they could be detrimental to growth in the capital-intensive infrastructure
sector.
"We
believe this is a significant increase in provisioning requirements," said
Sameer Bhise, analyst at JM Financial Services.
Incremental
Credit Costs
"(It)
will result in lower returns for lenders in project finance and reduce
incremental appetite for such exposures if implemented in current form,"
said Bhise of JM Financial.
On Friday, the Reserve Bank of India (RBI) proposed that lenders increase provisions
for under-construction infrastructure projects and enforce rigorous monitoring
of emerging stress.
The
central bank aims to increase standard asset provisioning to 1-5% of loans from
the current 0.4%, in a phased manner. Standard assets have a 5% provisioning
coverage ratio during the construction phase, reduced to 2.5% once a project
reaches the operational phase, and further cut to 1% if it achieves certain
financial benchmarks.
The
draft rules will apply to financing of projects in the infrastructure,
non-infrastructure and commercial real estate sectors. The central bank is
seeking views on the proposal, which have to be submitted by June 15.
Incremental
credit costs for public sector banks (PSBs) are expected in the range of 12-21
basis points (bps), he said.
Power
Finance Corp (PFC) dropped 9% to close at Rs 438, REC fell 7.5% to Rs 517.
Punjab National Bank declined 6.5% to Rs 127, while Canara Bank was down 5.5%
to Rs 592.
Credit
Discipline
RBI's
draft, coming amid rising infrastructure lending, also suggests banks will have
to classify a loan as non-performing if the project is delayed beyond six
months of the original stipulated deadline or date of commencement of
commercial operations.
Past
data show that many project loans were classified as standard assets even after
some of them were delayed by as much as six years from the scheduled deadline
of completion, without generating cashflow.
"In fact, the 5% provision is liberal and could have been higher under the
expected credit loss framework," said a bank economist. "The guidelines
will improve credit discipline and ensure only serious players (lenders and
borrowers) participate."
Other
public sector unit (PSU) stocks such as Mangalore Refinery and Petrochemicals,
MOIL, Bharat Heavy Electricals, Life Insurance Corporation of India, Mazagon
Dock, NLC India and Chennai Petro, among others, fell 4-8%.
The
plunge in infrastructure stocks stems from concerns that banks and NBFCs might
transfer part of the heightened costs to borrowers through increased interest
rates, said Pankaj Pandey, head of research at ICICI Securities.
"The
difference in provisioning requirement will be routed through profit and loss
account, and impact 0.4-0.8% net worth impact for larger private banks, but
higher at 1.5-3% - for PSU banks," said Rikin Shah, analyst at IIFL
Securities.
While
the guidelines will hit lenders from the time they come into force, they could
heighten investor trust on the earnings and provision numbers released by the
lenders, said some analysts.
In
the previous infrastructure lending boom of 2008-15, banks hid bad loans and
defaults, forcing the central bank to launch an asset quality review that led
to the unearthing of thousands of crores of rupees of hidden bad loans. That
led to investors losing money and the government having to invest more than Rs
3 lakh crore in capital to bring banks back into shape.
www.economictimes.indiatimes.com dt. 07-05-2024