PSU bank stocks tank as RBI proposes tighter project finance rules

New Delhi: PSU bank stocks declined on Monday after the Reserve Bank of India (RBI) proposed tighter rules to govern lending to projects under implementation.

The shares of Punjab National Bank (PNB) tumbled 6.41 percent, Canara Bank plunged 5.42 percent, Bank of Baroda (BoB) tanked 3.71 percent and Union Bank of India declined 3.12 percent on the BSE.

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The stock of State Bank of India dropped 2.86 percent and Bank of India dipped 2.57 percent.

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

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 percent 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 percent.

"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 percent 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 percent of the funded outstanding and then further down to 1 percent 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 percent from the outstanding at the time of achieving date of commencement of commercial operations, it said.

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