PSU Banks in Extreme Pressure As RBI Proposes To Tighten Lending for Project Finance

Top Public Sector Banks like State Bank of India, Canara Bank Punjab National Bank and every other PSU bank are all trading down by 2-5% from their previous day’s closing price as the Reserve Bank of India proposes to tighten Lending for Project Finance.

What is coming From RBI?

The Reserve Bank of India has proposed stricter regulations for project financing, which will make it more expensive for lenders(banks) to provide funds for various infrastructural and industrial projects like roads, ports, power plants and bridges. Under this new norm, the lenders would be required to set aside 5% of  the money they have lent as general provisions for all existing and new loans, presently the banks have to  provide only 0.4% of the fund amount for exposures which are not in default.

The regulations drafted suggest a 5% standard provision requirement for the loans during the construction phase; starting at 2% in March 2025, increasing to 3.5% in March 2026, and reaching 5% in March 2027, These provisions are to be distributed across the four quarters of every financial year.

What would be the impact of this move?

If this comes into place, then it would impact the profitability of banks with significant exposure to such projects,  these norms are coming at a time when the asset quality of the banks is improving in the segment of project lending, the primary reason for this being most of the funding has been done in the projects where the government was involved as a counterparty. These new norms will reduce the profits for banks due to the provisions which have to be deducted from their earnings only. 

Impact on PSU Banking stocks today

With this news, major Public Sector Banking stocks like State Bank of India, Canara Bank, and Punjab National Bank have fallen by 2-5% from their previous day’s closing price. The NIFTY PSU Bank Index is down by -3.75% at 7252.80.

Adding to that Public sector Finance Corporations like IREDA, REC AND PFC have also been impacted by this move. These guidelines are proposed to apply to both banks and non-bank lenders.

Conclusion: The tightening in lending for project finance will surely affect the profitability of both Banks and non-bank finance companies and the market has also reacted negatively to this news with all PSU Bank stocks and non-bank finance stocks correcting by 2-10 % today. The Nifty PSU Bank Index currently stands at levels of Rs.7250 and has given returns of more than 70% in the past year.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.