Here's why PFC, REC, PNB, BOB, SBI slipped up to 9% on May 06

Shares of public sector banks (PSBs) and state financial institutions were under pressure on Monday, falling up to 9 per cent on the BSE in Monday's intraday trade on profit booking, after the Reserve Bank of India (RBI) proposed tighter rules to govern lending to projects under implementation.

Power Finance Corporation (PFC) tanked 9 per cent to Rs 438.10 and REC slipped 7 per cent to Rs 519.60 on the BSE in the intraday trade. However, despite today's decline, PFC and REC have zoomed 70 per cent each in the past six months. 

Among other PSU financials, Punjab National Bank, Bank of Baroda, Canara Bank, Bank of India, State Bank of India, Union Bank of India, and UCO Bank dropped between 2 per cent and 5 per cent. In comparison, the S&P BSE Sensex was up 0.5 per cent at 74,242 at 09:29 AM.

The RBI, on Friday, proposed to set a floor for banks' loan exposure for project finance for consortium lending and mandated 5 per cent standard asset in the construction phase.

The central bank, in the draft guidelines on the financing of project loans, said, "In projects financed under consortium arrangements, where the aggregate exposure of the participant lenders to the project is up to Rs 1,500 crore, no individual lender shall have an exposure which is less than 10 per cent of the aggregate exposure”. CLICK HERE FOR FULL REPORT

Analysts at JM Financial Institutional Securities believe this will lead to a significant increase in provisioning requirement and will result in lower returns for lenders in project finance and reduce incremental appetite for such exposures, if implemented in current form.

"While this is prudent from a risk management perspective, coming from the regulator’s experience in the last credit cycle, we believe this can be detrimental to growth in the capital intensive infrastructure sectors in the economy," the brokerage firm said.

"Based on the banks' Pillar-3 disclosures, we estimated the additional credit costs for eight large banks under our coverage, if these guidelines were to to be issued in current form. We estimated additional credit costs in FY25 as 6/10/7/6 bps for HDFC Bank/ICICI Bank/Axis Bank/Kotak Bank. For PSBs, the incremental credit costs are expected in the range of 12-21bps," analysts said.

What CLSA said on the development

Analysts at CLSA, however, feel that there will be no impact on PFC's and REC's profit & loss (P&L) though the proposed norms will be a drag on their capital adequacy.

"The draft guideline is applicable for all lenders but non-bank finance companies (NBFCs) follow IndAs accounting. Per existing rules, the difference in provision requirements between RBI rules and IndAs will have to be adjusted via impairment reserves (equity line item). The overall impact on PFC and REC from higher standard asset will not be on their P&Ls but capital adeqyacy ratios. PFC's and REC's latest Tier 1 stood at 23 per cent - they are well capitalised," the CLSA note said.

Lenders now have to maintain minimum exposure in a consortium and they can sell their exposure only after the construction phase is over. This, along with higher provision requirements, CLSA said, is a big deterrent.

"Private banks were anyway limited in their participation in thermal and hydro projects, and these new regulations may reduce the risk of higher competition from banks in the renewable segments as well," the CLSA note said.