Final RBI norms on project financing positive trigger for the PFC

Additional provisions forDate of Commencement of Commercial Operations deferred standard assets are reduced to 0.375 per cent-0.5625 per cent per quarter vs. 2.5 per cent for cumulative deferments

The RBI has issued final project financing norms (effective from October 1, 2025) on the draft issued in May-2024. There are some key relaxations. Lower provisioning is required for standard assets. The revised provision is 1 per cent for under construction and 0.4 per cent for operational projects (vs 5 per cent and 2.5 per cent respectively in the draft).

 

Additional provisions for DCCO (Date of Commencement of Commercial Operations) deferred standard assets are reduced to 0.375 per cent-0.5625 per cent per quarter vs. 2.5 per cent for cumulative deferments. Another key change is income recognition on accrual basis for DCCO deferred standard assets (versus on cash basis).

 

The guidelines do not apply to projects where financial closure is achieved before October 1, 2025.

 

In terms of incremental impact compared to current norms, asset provisioning would rise by 25-60 basis points or bps for projects under construction, but there is no impact on operational projects. This would be a modest increase in credit costs. There would be limited impact on infra-focused non-banking financial companies or NBFCs given Stage1+2 ECL (Expected Credit Loss) provisions at present are close to the RBI’s final requirements. 

 

Net-net, given policy rate cuts and easing liquidity, this is a relief for lenders.

 

Specialised Non-Banking Financial Companies (NBFCs) like REC Limited and Power Finance Corporation (PFC) would be among key gainers and some PSU banks with infra exposure will also benefit. Since these norms apply after October, there could be “front-loading” of financial closure for projects. 

 

PFC holds a majority stake of around 52 per cent in REC.

 

Most exposures of PFC and REC would be categorised under project finance, except for ones given to discoms (under schemes like RDSS). Both PFC and REC carry adequate standard asset provisions, with Stage 1 and Stage 2 PCR at 1.13 per cent and 0.95 per cent, respectively, (Mar’25). Other NBFCs with relevant exposure include Bajaj Housing, LIC Housing Finance, PNB Housing Finance and Aditya Birla Housing Finance, Piramal Enterprises, Aditya Birla Finance, L&T Finance and IIFL Finance.

 

The power sector could see investments of $700 billion over the next 10 years, according to Moody’s. Renewable capacities are expected to grow to 500 GW by the financial year 2030 (FY30), from 215 GW (February 2025). PFC is the largest power-focused financier. 

 

The renewable portfolio stood at ₹69,423 crore (December 2024), and there’s a pipeline of ₹90,000 crore of renewable sanctions offering future visibility. Other infra loans saw growth of 115 per cent year-on-year (Y-o-Y) to ₹22,961 crore (December 2024) and contributed 4 per cent of loan book.

 

The renewable portfolio constitutes 13.8 per cent of the total loan book, but is expected to double over the next three years.

 

PFC’s asset under management or AUM is expected to grow at an annual rate of 14 per cent over FY25-27 driven by increase in renewables, other infrastructure loans, and investments in transmission and distribution.

 

Management expects 13-14 per cent loan growth and net interest margin or NIM at above 3.5 per cent in FY25.

 

The sanctioned loan portfolio is ₹2.52 trillion.

 

PFC can raise funds at a low cost due to a strong balance sheet and government parentage. The asset quality has improved. The gross and net stage 3 or GS3 and NS3 stood at 2.7 per cent and 0.7 per cent respectively as of December 2024, down from 9.4 per cent and 4.6 per cent respectively as of March 2019.

GS3 and NS3 could reduce to 1.7 per cent and 0.5 per cent respectively by FY27.

 

A total of 20 cases of bad assets are under resolution process, amounting to ₹13,501 crore. Out of these, 11 cases are in the NCLT for ₹11,510 crore. Three cases amounting to ₹4,961 crore are at advanced stage for resolution. Credit cost will reduce once these go through. PFC has 78 per cent provisioning on NCLT cases, hence recoveries could lead to substantial reversal of provisions.

 

PFC had return on assets or RoA at 3 per cent and return on equity or RoE at 19.5 per cent for FY24, and it should be able to maintain RoA at 2.8 per cent and RoE at 17.6 per cent or better until FY27, given AUM growth, steady NIM and improved asset quality.

 

The stock bounced sharply on the RBI’s final draft after a price correction of over 25 per cent in the last few months. The stake in REC also appreciated in valuation.