RBI’s Provisioning Norms Affect PSU Banks and Infrastructure Financers

RBI’s Provisioning Norms Affect PSU Banks and Infrastructure Financers

Subject: Economy

Sec: Monetary Policy

Tag: RBI’s Provisioning Norms

What Happened:

• The Reserve Bank of India (RBI) proposed tighter norms for project financing, recommending increased standard asset provisioning of up to 5% on loans.
• This move is anticipated to result in additional provisioning of 0.5-3% of banks’ net worth.
• Shares of state-owned banks and project financers fell significantly in response.
• The Common Equity Tier 1 (CET1) ratio, a measure of a bank’s core equity capital, could be impacted by 7-30 basis points.

Details of the Proposal:

• Under the proposed norms, lenders must make provisions of up to 5% of outstanding exposures for under-construction projects.
• These norms also apply to commercial real estate financing for all lenders and are set to be implemented immediately.

Impact on Financial Institutions:

• Analysts predict adverse effects on profitability and capital expenditure growth as provisioning requirements increase.
• PSU banks and infrastructure-focused financers like PFC and REC are expected to be particularly affected.

Expert Analysis:

• Analysts suggest that while the impact on profit after tax (PAT) may be limited for some institutions like IREDA, there could be marginal effects on net worth and Capital Adequacy Ratio (CAR).
• The robustness of institutions’ CAR levels may help absorb these impacts without significant consequences.

Impact on NBFCs:

• Additional provisions for non-banking finance companies (NBFCs) will be apportioned to the impairment reserve, sparing the impact on Return on Equity (RoE).
• Infrastructure-focused NBFCs like REC Ltd, PFC, and IREDA may see a potential hit of 200-300bps to their capital ratio.

Understanding Capital Adequacy Ratio (CAR)

• Capital Adequacy Ratio (CAR) is a measure of a bank’s capital in relation to its risk-weighted assets and current liabilities.

Risk Weighting:

• Risk-weighted assets consider credit risk, market risk, and operational risk to determine the appropriate amount of capital a bank should hold.

Regulatory Criteria:

• Basel III norms originally stipulated a capital to risk-weighted assets ratio of 8%.
• However, Indian scheduled commercial banks are mandated by the RBI to maintain a CAR of 9%, while public sector banks must adhere to a CAR of 12%.

Profit After Tax (PAT)

Profit After Tax (PAT) is a financial metric that represents the net profit of a company after deducting taxes. It is a key indicator of a company’s profitability and financial performance.

PAT is calculated as follows:

PAT=Net Profit−Taxes

Where:

• Net Profit is the total earnings of the company before taxes.
• Taxes represent the income tax expense incurred by the company.

PAT is an essential measure for investors, analysts, and stakeholders as it reflects the amount of money a company has earned after accounting for all expenses, including taxes. It provides insights into the company’s ability to generate profits and its overall financial health.

In financial analysis, PAT is often compared over different periods to assess the company’s performance trends. Higher PAT indicates stronger profitability and efficiency in generating earnings for shareholders.