PSU bank stocks tank as RBI proposes tighter project finance rules

PSU bank stocks declined on Monday after the Reserve Bank proposed tighter rules to govern lending to projects under implementation.

Shares of Punjab National Bank (PNB) tumbled 6.41 per cent, Canara Bank plunged 5.42 per cent, Bank of Baroda tanked 3.71 per cent and Union Bank of India declined 3.12 per cent on the BSE.
The stock of State Bank of India dropped 2.86 per cent and Bank of India dipped 2.57 per cent.

Also, Power Finance Corporation plummeted 8.93 per cent and REC dropped 7.35 per cent.

The Reserve Bank on Friday proposed tighter rules to govern lending to projects under implementation.

The central bank's draft rules include a classification of the projects as per their phase and higher provisioning of up to 5 per cent during the construction phase, even if the asset is standard.

In the last credit cycle, project loans were seen to have led to a build-up of stress on bank books. The standard asset provisioning otherwise stands at 0.40 per cent.

"The domestic indices traded in a range-bound manner influenced by PSU banks' underperformance due to the RBI's tighter norms on lending to projects under development," Vinod Nair, Head of Research at Geojit Financial Services, said.

Under the proposed norms, first announced in September 2023 and the details revealed on Friday, a bank has to set aside 5 per cent of the exposure during the construction phase, which goes down as the project becomes operational.

Once the project reaches the 'Operational phase', the provisions can be reduced to 2.5 per cent of the funded outstanding and then further down to 1 per cent if certain conditions are met.

These include the project having a positive net operating cash flow that is sufficient to cover current repayment obligation to all lenders, and the total long-term debt of the project with the lenders has declined by at least 20 per cent from the outstanding at the time of achieving date of commencement of commercial operations, it said.