RBI Pressures PSU Banks to Cut Project Finance Lending

Due to the Reserve Bank of India's proposal to limit lending for project finance, major public sector banks, including State Bank of India, Canara Bank, Punjab National Bank, and all other PSU banks, are all trading lower by two to five percent from their closing prices on the previous day.

What is announcement from RBI?

Stricter project finance restrictions, as proposed by the Reserve Bank of India, will increase the cost of funding for different industrial and infrastructure projects, such as bridges, ports, power plants, and highways, for lenders (banks). The banks are currently only required to provide 0.4% of the fund amount for exposures that are not in default; under the new standard, lenders would have to set aside 5% of their total loan amount as general provisions for all loans, including new and existing.

According to the proposed regulations, loans made during the construction phase should have a 5% standard provision, which would increase from 2% in March 2025 to 3.5% in March 2026 and 5% in March 2027. The provisions would be spread out over the four quarters of each fiscal year.

What would be the impact of this move?

If these regulations are implemented, banks that have a large amount of exposure to these kinds of projects may see a decline in profitability. This is because the majority of funding for project lending has been provided by the government acting as a counterparty, and these regulations are being implemented at a time when bank asset quality is improving in this area. Because of the provisions that must be subtracted from their earnings alone, these new regulations will result in lower profits for banks.

Impact on PSU Banking stocks today

Major Public Sector Banking companies, including Punjab National Bank, State Bank of India, and Canara Bank, have dropped 2-4 percent from their closing price on the previous day as a result of this news. At 7252.80, the NIFTY PSU Bank Index is down -3.75%.

Furthermore, this action has had an effect on public sector finance corporations like IREDA, REC, and PFC. It is suggested that both banks and non-bank lenders must abide by these rules.

To Summarize

Following the RBI's proposal to tighten lending for project finance, the Nifty PSU Bank index, which includes PSU Bank stocks like SBI and Canara Bank, is down by 3.75% today. In order to minimize strain on bank books during project implementation, the Reserve Bank suggests tightening lending regulations. Provisioning rises to 5% during the building phase and decreases according to the stage of the project and satisfaction of requirements. Comments from the public are welcome until June 15.