IREDA, REC, PSU Bank shares drops after RBI's stricter project finance framework

The lending companies and PSU banks stocks declined after Reserve Bank of India (RBI)'s circular proposing stricter guidelines on project financing.

Indian Renewable Energy Development Agency (IREDA) (down 4.06%), REC (down 7.29%), Power Finance Corporation (PFC) (down 8.20%). Punjab National Bank (down 5.85%), Canara Bank (down 4.82%), Union Bank of India (down 3.84%), Bank of Baroda (down 3.35%), Bank of Maharashtra (down 2.85%), Indian Overseas Bank (down 2.72%), State Bank of India (SBI) (down 2.65%) and Central Bank of India (down 2.53%).

RBI guidelines on project finance includes that 5% general provisions should be made on all existing and fresh project loans which are in the "construction phase," meaning before commercial operations commence.

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. The standard provisions are well above from the current provision requirement of 0.4%.

The framework proposed to tighten certain lending criteria, which should improve the project viability and increase standard asset provisioning to 1-5 per cent of loans from current 0.4 per cent in a phased manner.

The draft guideline is applicable for all lenders but NBFCs follow IndAS accounting. As per existing rules, the difference in provision requirement between the RBI rules and IndAS need to be adjusted via impairment reserves.

Domestic broker said that for banks, estimate additional provisions requirement of 0.5-3% of net worth and CET1 ratio hit 7-30 bps(higher for PSU Banks), for NBFCs , additional provisions will not be routed through P&L, but instead will be apportioned to the impairment reserve ( cannot be included in the capital ratio and NNPA calculations) therefore NBFCDs shall not have RoE impact, but Infra NBFCs such as REC, PFC, IREDA can see potential hit of 200-300 bps to their capital ratio. Valuation of these NBFCs can also be impacted as the adjusted net worth will be 8-13% lower.

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