Why India's banking stocks are on a decline
In the wake of the Reserve Bank of India's (RBI) proposed changes to project financing regulations, major banking stocks including HDFC Bank, ICICI Bank, State Bank of India (SBI), and Punjab National Bank have experienced a decrease of up to 9% over the past three days. The proposed regulations include standard asset provisioning of up to 5% on loans. According to analysts at Macquarie, these changes are viewed as 'onerous' by those managing project finance.
Indian Banks Association to discuss RBI's proposals
The Indian Banks Association (IBA) is set to discuss the RBI's proposed changes and provide feedback by June 15. This feedback could potentially lead to modifications in the RBI's proposed rules. If implemented, these new measures could slow down recovery in project finance or capex cycle as banks may significantly reduce project finance credit.
Proposed regulations could impact infrastructure project funding
The proposed regulations would require banks to set aside a provision of 5% of the loan amount for projects still under construction. According to Rajashree Murkute, Senior Director at CareEdge Ratings, these new norms could pose funding challenges for both under-construction and operational infrastructure projects. Murkute also noted that the requirement to reduce debt by 20% to lower provisioning could delay interest rate benefits realization for such operational projects despite an improved credit profile.
Public sector banks could face increased credit costs
JM Financial has predicted that if these guidelines are implemented, public sector banks' incremental credit costs could rise between 12-21 basis points due to their higher exposure to infrastructure loans compared to private banks. Analysts believe that if these rules are finalized, they could deter lending and dampen capex pick-up in the economy. The government is still finalizing these new rules.
