RBI's Proposed Norms for Project Financing Could Impact Bank Provisioning

• 07 May 2024

The Reserve Bank of India (RBI) has released a draft framework proposing stricter norms for project financing, potentially affecting banks' provisioning and capital ratios.

Key Points

• Increased Standard Asset Provisioning: RBI's draft framework recommends up to 5% standard asset provisioning on loans, likely resulting in additional provisioning of 0.5-3% of banks' net worth.
• Impact on CET1 Ratio: IIFL Securities estimates a potential decrease of 7-30 basis points in banks' Common Equity Tier 1 (CET1) ratio due to increased provisioning.
• Project Finance Definition: Project finance involves funding based on revenues generated by a single project, typically used for large installations like power plants and infrastructure.
• Reduction in Provisions: Draft guidelines propose reducing provisions to 2.5% of funded outstanding once a project becomes operational, further decreasing to 1% under specific conditions.
• Impact on NBFCs: Infrastructure-focused NBFCs like REC Ltd, PFC, and IREDA may face a potential hit of 200-300 basis points to their capital ratio.
• Market Reactions: Share prices of infrastructure-focused NBFCs and major banks declined significantly following the announcement of RBI's draft norms.
• Consortium Arrangements: Draft norms specify exposure limits for projects financed under consortium arrangements, aiming to mitigate risks for lenders.