The Reserve Bank of India released a draft proposing tighter norms for lending and heightened monitoring for under-construction infrastructure projects. Following this, the PSU bank stocks took a dive on Monday.
During the intra day trading the PSU bank index plunged as much as 3.5%, dragged down by Punjab National Bank, Canara Bank, Bank of Baroda and Union Bank. All these banks slumped 4%. Likewise, NBFCs like REC, Power Finance and IREDA also crashed up to 12% as they mainly focus on finance power projects.
The RBI has proposed that the lenders should set aside a provision of 5% of the loan amount when a project is in the construction phase. Once the project is operational, the portion is reduced to 2.5% and when the project has adequate cash flow, the required provisions will further be cut to one percent.
The lenders are required to make the five percent provision in a phased manner: 2% in FY25, 3.5% in FY26 and 5% by FY27.
At present, lenders are required to have a provision of 0.4% on project loans that are not overdue or stressed. Banks should also have clear visibility of the date on which a project is expected to begin commercial operations and increase provisions in case operations are delayed.
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