RBI's Proposed Norms to Raise Credit Costs for Banks

29 May 2024 CW Team

Credit costs are set to moderately increase, impacting bank profitability and potentially leading to a loss of accounts, if the Reserve Bank of India?s proposed provisioning norms for projects under construction are implemented. This adjustment is likely to affect public and private banks differently, according to a report by CareEdge Ratings.

The report predicts an incremental provisioning impact of 0.2% on public banks and 0.1% on private banks between FY25 and FY27. Furthermore, the implementation of this framework may coincide with the Expected Credit Loss (ECL) framework mandated by the RBI, which requires banks to recognize losses on loans as soon as they are anticipated, regardless of whether the borrower has defaulted.

Sanjay Agarwal, Senior Director at CareEdge, highlighted the potential financial repercussions, stating, If the higher charge on the existing stock of funded projects is made by additional provisioning in the profit and loss account, the profits of the concerned banks could be impacted by up to 11% in public banks and 4% in private banks over these three years.

Despite the short-term financial strain, the report suggests that strong asset quality can help lenders maintain balance sheet strength. The increased provisions during the early project stages are expected to reverse once the projects are completed and begin generating cash flows as scheduled.

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