RBI’s Draft Guidelines Cause Shares of REC, PFC, IREDA to Plummet: Analysis

Shares of REC Ltd. and Power Finance Corporation Ltd. (PFC) experienced a significant decline of up to 12% on Monday, erasing the gains they had achieved in the previous week when they hit record highs.

This downturn was triggered by the release of the Reserve Bank of India‘s draft guidelines on project financing, which stipulated a 5% general provision requirement for all existing and new project loans in the ‘construction phase’ prior to the commencement of commercial operations.

The proposed guidelines would impact both banks and non-bank lenders, necessitating standard provisions on project loans for infrastructure, non-infrastructure projects, and real estate.

The RBI’s draft recommendations outlined a phased approach to provisioning, allowing for reductions as projects transition to operational status and demonstrate positive cash flow.

According to a note by brokerage firm IIFL Securities, the additional provisioning requirements could lead to a 0.5% to 3% impact on banks’ net worth and potentially decrease their CET-1 ratio by 7 to 30 basis points.

For non-bank lenders such as REC, PFC, and IREDA, IIFL Securities forecasts no impact on Return on Equity (RoE) but anticipates a decrease in their tier-1 ratio by 200 to 300 basis points, which could also influence their valuation multiples.

As trading concluded on Monday, shares of these companies reflected the market’s reaction to the draft guidelines issued by the RBI, signaling a period of adjustment for the lending institutions.