Shares of major Indian banks, including State Bank of India (SBI), Punjab National Bank (PNB), and HDFC Bank, have seen a significant drop in recent days. This decline comes after the Reserve Bank of India (RBI), the country’s central bank, proposed stricter guidelines for financing infrastructure projects.
Why the Drop?
The RBI’s draft project finance norms aim to make lending to ongoing projects more cautious for banks. Here’s what’s causing the jitters:
- Higher Provisioning: Currently, banks set aside a small amount of money (provision) to cover potential losses on loans. The RBI is proposing a significant increase in this provision, especially during the construction phase of projects, which can be risky. This means banks will have to hold onto more money instead of lending it out, potentially affecting their profits.
- Tighter Consortium Lending: Large projects often involve multiple banks lending money together (consortium lending). The RBI’s proposal suggests setting a minimum amount each bank must contribute, making it potentially less attractive for them to participate.
Impact on Banks
Investors are worried that these stricter rules could make project financing less profitable for banks. This could lead to lower future earnings for the banks, which is why stock prices are falling.
- SBI, PNB, and other public sector banks (PSBs) are particularly affected as they are major players in project financing. Their stocks have seen the sharpest decline, with some dropping as much as 9% in the past three days.
- HDFC Bank, a private sector bank, has also been impacted, although to a lesser extent. This is because they have a more diversified loan portfolio compared to PSBs.
What’s Next?
The RBI’s draft norms are currently open for public feedback. The final rules may be different after considering industry concerns. Here are some possible scenarios:
- Banks may adjust their strategies: They might become more selective in choosing projects or focus on loans with shorter construction phases to minimize risk.
- Project developers may face challenges: Securing funding for projects could become more difficult and expensive with stricter lending norms.
Overall, the new RBI guidelines are intended to make project financing more prudent and reduce the risk of bad loans for banks. However, the short-term impact is being felt by investors and could potentially slow down infrastructure development in the country.
