Public sector banks may face 11% hit on profits and private sector banks 4% if the RBI project finance norms are implemented on the existing stock of funded projects.
“Since the banks are currently under IRAC norms if the higher charge on the existing stock of funded projects is to be made by additional provisioning in the profit and loss account, the profits of the concerned banks could be impacted by up to 11% in public banks and 4% in private banks in these three years (assuming ECL norms are not implemented), CareEdge Ratings said in a report.
The proposed requirements of additional provisions by the RBI to cover the funding of projects under
implementation consists of a combination of one-time regulatory charge on the current stock of such exposures of the Banks plus an incremental positive/negative additional charge on the marginal increase/decrease over the opening stock of such exposures for each period. So long as the lenders are able to maintain stable asset quality, these provisions will lead to reasonable strengthening of the balance sheet of these lenders. Higher provisions during initial project periods will get reversed once the projects get completed and generate cash flows as was originally scheduled.
Over a period, as banks move to Ind As, the pricing structure is expected to move to cover actual credit losses. Hence, the impact is likely to be limited, it said.
The current norms
Currently, banks are required to follow IRAC (Income Recognition and Asset Classification) Norms for provisioning requirements, under which they need to maintain 0.75% for CRE (Commercial Real Estate)- residential housing projects, 1.0% for non-residential housing CRE and 0.4% for all remaining loans, in standard category, irrespective of phase.
If the draft guidelines are implemented in their existing form, for public sector banks, the impact of incremental provisioning would be up to 20 bps (in terms of credit cost / net advances) for each of the next three years whereas for private sector banks’ incremental provisioning would be upto 10 bps for each of the years between FY25 to FY27. Banks are also preparing themselves for the adoption of ECL framework as required by RBI.
ECL provisioning
The implementation of ECL provisioning would overlap with the implementation of these provisioning norms. Currently, banks in India are in a strong position with high capital adequacy ratios, strong profitability and a strong ability to raise capital from the equity markets. The proposed requirements of additional provisions by the RBI to cover the funding of projects under
implementation consists of a combination of one-time regulatory charge on the current stock of such exposures of the Banks plus an incremental positive/negative additional charge on the marginal increase/decrease over the opening stock of such exposures for each period. “So long as the lenders are able to maintain stable asset quality, these provisions will lead to reasonable strengthening of the balance sheet of these lenders. Higher provisions during initial project periods will get reversed once the projects get completed and generate cash flows as was originally scheduled,” it said.
On NBFC – IFCs
If the draft guidelines are implemented in its existing form, for the NBFC-IFCs, Tier 1 is expected to reduce up to 120 bps (as loans guaranteed by the centre/ state government are expected to be outside its preview).
“Considering the current healthy capitalisation position of NBFC-IFCs, the reduction in Tier 1 is not expected to have any material impact on future disbursements or approval processes (single/ group exposure concentration limits are linked to Tier 1 capital). Also, no impact is expected on profitability metrics (return on equity) or reported net worth as the difference in provision requirements between the RBI rules and IndAS will have to be adjusted via the impairment reserves and will not be routed through net profits/losses,” it said.
