Credit costs are expected to moderately increase impacting profitability and loss of accounts for banks if the Reserve Bank of India’s proposed provisioning norms for projects under construction are implemented.
The impact of incremental provisioning for public banks would be 0.2% and 0.1% on private banks between FY25 and FY27, said a report by CareEgde Ratings.
There is a possibility that the implementation of this framework will overlap with the expected credit loss (ECL) framework that is required by RBI. The ECL framework requires banks to recognise losses on loans as soon as they are expected to occur, even if the borrower hasn’t actually defaulted.
“If the higher charge on the existing stock of funded projects is to be 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 in these three years”, said Sanjay Agarwal, Senior Director, CareEdge.
As long as lenders are able to maintain strong asset quality, the provisionings are expected to reasonably strengthen the balance sheet of the lenders. Higher provisions during initial project periods will get reversed once the projects get completed and generate cash flows as was originally scheduled, said the report.
