Shares of India's state-run banks, which include State Bank of India, Punjab National Bank, Canara Bank, Union Bank of India, Maharashtra Bank, and Bank of Baroda, fell as much as 6% on Monday following the release of a draft by the Reserve Bank of India (RBI) that suggested stricter lending guidelines and more frequent monitoring of infrastructure projects that were still under construction.

The Nifty public sector undertaking (PSU) bank index dropped as much as 5% during trading today, after rising an amazing 27% so far in 2024. Every component of the PSU Bank index was experiencing negative trading. With each bank falling more than 3%, Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda, and Bank of India were the leading laggards on the index.

Everything on the proposal by the RBI

According to the central bank's draft regulations, projects must be categorised according to their stage, and even for ordinary assets, there may be a higher provisioning of up to 5% during the building phase.

Compared to the existing non-default exposure provision of 0.4%, this is a far larger amount.

The provisions can be lowered to 2.5% of the funded amount once the project enters the "Operational phase," and if other requirements are satisfied, they can be lowered even further to 1%.

Two of these are that the project's total long-term debt with the lenders has decreased by roughly 20% from the amount owed at the time of achieving the Date of Commencement of Commercial Operations, and the project has a positive net operating cash flow that is sufficient to cover current repayment obligations to all lenders, according to the RBI.

It is suggested that the criteria set forth by the central bank should apply to lenders who are not banks. The domestic brokerage firm IIFL Securities stated in a note that it believes the banks' CET-1 ratio could suffer by seven to thirty basis points and that an additional provisioning requirement could be between 0.5% and 3% of their net worth. The NBFCs PFC, REC, and IREDA saw their shares fall by 8%, 5%, and 4%, respectively, as a result of the RBI's new restrictions.

Regarding non-bank lenders like REC, PFC, and IREDA, IIFL Securities anticipates no change in their Return on Equity (RoE) but anticipates a 200–300 basis point knock to their tier-1 ratio, which may also have an effect on their valuation multiples. "The PSU banks index has seen a significant upward move lately, capping several months of encouraging development. Investors may, however, expect a period of consolidation or profit-taking in the near future as market dynamics change.

The market analyst Ravi Singh stated, "This anticipated adjustment comes amid the recognition that certain PSU bank stocks have become overvalued and overbought, signalling a cautious approach for investors."