Provisioning impact of draft project finance norms seen at 10-20 bps for banks

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Mumbai The impact of RBI’s draft project finance norms on incremental provisioning for public sector banks is estimated to be up to 20 bps each for the next three years whereas for private sector banks is expected to be up to 10 bps, according to Care Edge Ratings.

For NBFCs, excluding NBFC-IFCs, tier-I capital is expected to reduce by up to 83 bps and for NBFC-IFCs by up to 120 bps.

“Under the new guidelines, credit costs will increase, thereby impacting the profit and loss accounts of the banks. Banks are also preparing themselves for the adoption of ECL framework as required by RBI,” Care Edge said in a note, adding that the implementation of ECL provisioning is likely to overlap with the implementation of these provisioning norms.

Draft guidelines

The RBI recently released draft guidelines on financing of projects in infrastructure, non-infrastructure and commercial real estate sectors, wherein it proposed increasing the provisioning requirement on standard assets to up to 5 per cent by March 2027. Other proposals include higher provisions for delayed projects, tightened exposure criteria, classification of such loan accounts, and maintaining project-specific data.

Currently, banks need to maintain 0.75 per cent provisions for commercial real estate – residential housing projects, 1 per cent for non-residential housing CRE and 0.4 per cent for all remaining loans, in standard category.

“If the higher charge on the existing stock of funded projects is to be made by additional provisioning in the profit and loss account, the profits of the concerned banks could be impacted by up to 11 per cent in public banks and 4 per cent in private banks in these three years (assuming ECL norms are not implemented),” the note said.

However, the higher provisions during initial project periods will get reversed once the projects get completed and generate cash flows as originally scheduled. Over a period, as banks move to IndAs, the pricing structure is expected to move to cover actual credit losses, owing to which overall impact will be limited, it added.