Selling pressure in the shares of state-owned banks and infrastructure financing companies ebbed on Wednesday, as stocks staged a rebound on expectations that the Reserve Bank of India’s (RBI) draft rules on project financing will be diluted or may not be implemented in its existing shape. The expectations rose after reports emerged that the Indian Banks’ Association is likely to write to the banking regulator to review its draft guidelines.
The Nifty PSU Bank index rose 1% on Wednesday after tumbling around 6% in the previous two sessions following the release of RBI’s draft norms. Union Bank of India, Central Bank of India, Punjab National Bank, UCO Bank and Indian Bank were the top gainers as they rose 2-4%. The largest public sector bank – State Bank of India – rose 1.2%, after having slipped 3.3% in the previous two sessions.
Shares of REC, Power Finance Corp, and Indian Renewable Energy Development Agency, which had nosedived 6-13% in the previous two sessions, rose 1.8-5.4% on Wednesday.
In a circular on May 3, RBI had proposed in its draft guidelines that lenders should maintain a provision of 5% for loans extended to under-construction projects, including for current outstanding exposure. This is significantly higher than the current norms which mandate banks and non-banking financial companies (NBFCs) to maintain 0.4% provisioning coverage ratio for standard assets.
“While every objective of the regulator is to strengthen the balance sheet of banks and make counter cyclical buffers when the health of the sector is the best seen in the last decade or so…what is surprising is how draconian these rules are,” brokerage firm Macquarie said in a note.
The draft norms are seen as particularly negative for PSU banks and infrastructure financing companies given their higher exposure to such lending. Moreover, experts see this as a hindrance to a potential recovery of private capex cycle, which has not yet shown any major signs of picking up.
Apart from this, analysts said the norm that individual lenders shall not have exposure less than 10% in the consortium for projects with aggregate exposure up to Rs 15 billion, is a negative for lenders.
“We believe minimum 10% exposure requirement will limit the opportunities for smaller players,” IIFL Securities said in a note. Macquarie said banks will significantly scale back credit for project financing if the draft rules are implemented. RBI has sought comments on the draft guidelines till Jun 15. Post this, experts believe it might take 3-6 months for the final rules to be framed.
Top NBFC officials in the sector also stepped in to allay investors’ fears. Vivek Kumar Dewangan, chairman and managing director of REC, said the additional provisioning will be done through impairment reserves, which will impact capital adequacy ratio. However, he said REC has a cushion of higher capital adequacy ratio.
“My tier 1 capital is at about 23.32% as against requirement of 15% for capital adequacy by RBI. So, I have subsequent cushion. Plus, it is only draft guidelines,” Dewangan said, adding that the provisioning needs to be done over a period of three years, and not right now. As per RBI norms, lenders would have to make the provisions of 5% in a phased manner by FY27.
Apart from banks and NBFCs, the Nifty Infrastructure index also rebounded on Wednesday as it rose over 1%, snapping three-day losing streak.
“We expect this impact is now largely factored in, and the spotlight shifts to the impending results of the PSU banks. Given that PSU banks have been delivering better-than-expected returns in recent quarters and are still at an attractive price-to-book ratio of 1.4x, we anticipate the PSU banks to do well in the near term,” said Anwin Aby George, research analyst at Geojit Financial Services.
