Shares of PSU bank stocks, at least four of which have more than doubled in value in just 1 year, fell up to 6% today with Canara Bank, Punjab National Bank and Bank of Baroda leading the downside. India’s largest lender State Bank of India (SBI) also fell over 3% as a result of which Nifty PSU Bank index was down over 4%.
The downside was an impact of RBI’s draft circular proposing tighter guidelines on project financing under which lenders would have to make provisions of up to 5% of the outstanding exposures during construction, which would reduce to 2.5% once the asset was operational.
Under the new proposed guidelines, individual lenders in the consortium for projects with aggregate exposure up to Rs 1,500 crore shall not have less than 10% exposure.
“We believe a minimum 10% exposure requirement will limit the opportunities for smaller players. We estimate additional provision requirement of 0.5-3% of net worth, and CET1 ratio hit of 7-30bps (higher for PSU banks),” IIFL Securities said.
The impact of the RBI circular was also seen on PFC, REC and IREDA, the shares of which fell 8%, 5% and 4%, respectively.
“For NBFCs, additional provisions will not be routed through P&L, but instead will be apportioned to the impairment reserve (cannot be included in the capital ratio and NNPA calculations). Therefore NBFCs shall not have RoE impact, but infra-focused NBFCs ala REC, PFC and IREDA can see a potential hit of 200-300bps to their capital ratio. Valuation of these NBFCs can also be potentially impacted as the adjusted net worth will be 8-13% lower,” IIFL said.
However, infrastructure loans are relatively small at 8% of loans compared to about 15% in FY2015.
“We do not think there is an immediate impact. The memories of the last corporate cycle are still quite fresh, which create concerns about the current guidelines,” said M B Mahesh of Kotak Institutional Equities.
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