The shares of REC Ltd., Power Finance Corporation Ltd. (PFC) and IREDA plunged on Monday to give up most of their previous week’s gain after the Reserve Bank of India’s (RBI) draft guidelines on project financing.
Not only these, but the shares of public sector banks (PSBs) and state financial institutions were under pressure falling up to 9% on the BSE.
PFC tanked 9% to Rs 438.10 and REC slipped 7% to Rs 519.60 on the BSE in the intraday trade.
Further, the shares of IREDA extended losses and fell up to 6%. This marked their biggest single-day drop since December last 2023. The stock has plunged over 10% in the last five sessions.
What is the RBI’s draft guidelines?
The Reserve Bank of India has released draft guidelines on project financing on late Friday evening.
It mentioned that 5% general provision should be made on all existing and fresh project loans which are in the construction phase, meaning before commercial operations commence.
The draft guidelines further stated that the standard provisions on project loans can be reduced to 2.5% once the projects are operational and can be further reduced to 1% of the funded outstanding once the project has positive net operating cash flow that is sufficient to cover the current payment obligations and the long-term debt of the project has declined by at least 20% with lenders.
In projects financed under consortium arrangements, where the aggregate exposure of the participant lenders to the project is up to Rs 1,500 crore, no individual lender shall have an exposure which is less than 10 per cent of the aggregate exposurethe central bank said.
It has also propose a phased implementation of the 5% provisioning. It said that the 2% provisioning will come with effect from March 2025, while the 3.5% will come with effect from March 2026.
The 5% will come with effect from March 2027, it said.
What analysts say on the development?
Brokerage firm IIFL Securities in a note said when it comes to non-bank lenders like REC, PFC and IREDA, they expect no impact on their Return on Equity (RoE).
It estimates additional provisioning requirement to be between 0.5% to 3% of the banks’ net worth and may hurt their CET-1 ratio by 7 basis points to 30 basis points.
Analysts at JM Financial believe this is a significant increase in provisioning requirement and will result in lower returns for lenders in project finance and reduce incremental appetite for such exposures, if implemented in current form.
“While this is prudent from a risk management perspective, coming from the regulator’s experience in the last credit cycle, we believe this can be detrimental to growth in the capital-intensive infrastructure sectors in the economy,” it said.
