State Bank of India (SBI), the country’s largest lender, may reprice infrastructure loans upwards if the Reserve Bank of India’s draft on project financing gets implemented, a top official said.

The state-owned bank’s infrastructure loan book stands at Rs 3.94 lakh crore as on 31 March 2024.

“If the draft guidelines become a reality, the pricing of such loans may get revisited,” SBI chairman Dinesh Khara said.

Based on the broad assessments the bank has done, the incremental provisions required for ongoing infra project loans will not be very significant. “We will be able to absorb those additional provisions without much disruption. We will be looking at repricing the loans,” Khara said. 

The fallout will lead to a rise in interest cost for infrastructure companies. Canara Bank managing director and CEO K Satyanarayana Raju has also indicated that banks will pass on the higher cost to their borrowers, like they did to the NBFCs when the RBI hiked risk weight on the non-bank lenders. The price rise can move across the value chain as builders decide to pass it on to the end consumers.

As per the RBI’s draft guidelines, issued on 3 May, banks have to set aside a provision of 5% of the loan amount for infra projects at the construction phase. At present, lenders are required to have a provision of 0.4% on project loans that are not overdue or stressed.

Khara believes the RBI’s tightening of norms on infrastructure project financing will not have any impact on the bank’s capital adequacy ratio (CAR).

"We already have Rs 32,000 crore non-performing asset (NPA) provisioning in our book, and can easily absorb any additional provisioning in no time. Even with our current CAR, we have the potential to raise an additional Rs 7 lakh crore," Khara told analysts in a post-earnings conference call.

Khara also said that SBI has ample room to raise funds through additional tier-1 (AT-1) bonds, or even equity at appropriate valuations.

As on 31 March 2024, SBI's CAR stands at 14.28%, above the RBI's regulatory requirement of 12% for public sector lenders.

Khara said SBI will communicate its views on the proposed project finance draft rules to the RBI. The regulator may have the feeling that risk on infra project financing is not properly priced, he added.

The Indian Banks’ Association (IBA) will channelise the views of the banks to the RBI. The regulator has sought the stakeholders’ comments on the draft norms for project financing until 15 June 2024.

Last year, the RBI issued a discussion paper on the expected credit loss (ECL) framework for loan-loss provisioning. Under this, banks are required to assess expected losses on their overall financial assets and make provisions accordingly, rather than waiting until the loan turns into an NPA. The date of when the transitioning to the ECL framework needs to be undertaken has not been mentioned but it will require banks to do more provisioning.

As per SBI’s assessment, migration to the ECL framework will require additional provisioning of Rs 30,000 crore. SBI, according to Khara, has a provision buffer of Rs 33,000 crore.

“For ECL, our assessment was somewhat Rs 30,000 crore, to be provided over five years. Our non-NPA provisions today are at around Rs 33,000 crore,” the SBI chairman said.