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RBI Proposes Tighter Lending:  PSU Banks Under Pressure

RBI recently proposed new rules for project finances that can prove expensive for banks and financial institutions.

RBI’s proposal

Project financing includes lending funds for undertaking projects related to power plants, roads, bridges, ports, and more. 

Project Finance

Banks and other institutions will need to have 5% of the funds lent reserved or set aside for new as well as existing loans as a general provision. Till now, this requirement was only 0.4% of the funds lent and are not in default.

The requirement

This requirement will increase in a strategic manner. I.e. banks will have to set aside 2% of the funds from March 2025, 3.5% from March 2026 and 5% in March 2027. 

Timeline

These funds would be debited from earrings and would severely impact the profitability of banks and financial entities lending funds.  This resulted in the Nifty PSU Bank index falling by almost 4% on Monday.

Reduced profitability

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