RBI guidelines for project finance, CRE: A smaller provisions hike's no big worry for banks, NBFCs
project finance
and
commercial real estate
(CRE) might have only a small and negligible profitability impact on both banks and
NBFCs
, as the increase in immediate liabilities is less than a percentage point from those existing rules - even in the worst-case scenario. Financial and banking stocks surged on Friday.
Bankers and analysts, who had pencilled in up to a 150-basis point impact on return on assets (RoAs) for lenders, now expect no new provisioning requirements as NBFCs are already on the more stringent Ind-AS accounting norms while for banks the impact is small. One basis point is 0.01 percentage point.
Karthik Srinivasan
, group head, financial sector ratings at
ICRA
said with no retrospective provisions and peak provisions much below the 5% proposed in the draft guidelines, there will be a minimal impact on lenders.
"Although we are yet to create a hypothesis and do a study on the impact, it is nothing like the 150 basis points on RoA basis we had predicted earlier. We do not expect any real impact on banks or NBFCs," Srinivasan said. ICRA had earlier expected the annual impact on RoA at 100-150 bps for lenders, with funding costs going up by 20-40 bps.
Both these issues will not arise as in the final guidelines general provisions required for CRE, CRE-RH (CRE-Residential Housing) and other infrastructure projects have been reduced to between 1% and 1.25% in the construction phase from a peak of 5% in the draft guidelines.
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Financials Surge
The Nifty financial index surged 1.3%, and financial stocks were at the forefront of the stellar Nifty 50 rebound Friday from a sharp sell-off Thursday.
HDFC Bank
, the biggest lender by market value, climbed 1.44%, while Bajaj Housing Finance too climbed 1.4%.
Provisions for projects in the operational phase have also been reduced to between 0.40% and 1%, with operational infrastructure project provisions kept at 0.40%, the same as it is currently. The new guidelines will come into force from October 1.
Rajkiran Rai
, managing director at infrastructure financier NaBFID, said the final guidelines limit his firm's provision increase to just 5 basis points.
"If we were pricing a loan at 8%, now we will price it at 8.05%. This would have increased to 9.50% if the original guidelines had remained, so this is a big relief. The new norms also have clauses saying at least 50% to 75% of the land must be acquired for the loan to be sanctioned. This could delay loan sanctions but it will bring uniformity in application since different projects were so far treated differently on land acquisition," Rai said.
For loans on infrastructure projects which have been delayed beyond three years from the date of commencement of commercial operations (DCCO), lenders have to make an additional provision of 0.375% and a 0.5625% provision on non-infrastructure project loans (including CRE and CRE-RH), for each quarter of deferment, over and above the applicable standard asset provision. "Provisioning requirement for projects beyond DCCO up to two years will go up to 4% vis-a-vis original guidelines where provision was only 0.4%," said an analyst. "Now, within DCCO, the first quarter itself will attract higher provision."
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