Shares of public sector project financing firms such as IREDA, PFC, REC, HUDCO and IRFC surged on Friday, June 20, after the Reserve Bank of India (RBI) finalised the new project financing guidelines.
On June 19, the RBI released the final directions on project finance norms, asking lenders to maintain general provision of 1.25 percent on Commercial Real Estate (CRE), and 1 percent each on Commercial Real Estate-Residential Housing (CRE-RH) and other portfolio during the construction phase.
Banks shall have to maintain 1 percent general provisions on commercial real estate projects during the operational phase after commencement of repayment of interest and principal, and 0.75 percent on residential housing (CRE-RH), while 0.40 percent on all other projects, the regulator said.
The final directions are softer than those in the draft norms, posing as a positive for lenders. The May 2024 draft proposal suggested five percent standard assets provisioning for under-construction projects. The final regulations give lenders a much-needed respite.
At 9.17 a.m., shares of IREDA were 1.7 percent higher at Rs 161.45, PFC shares surged 3.7 percent to Rs 404.6, REC's stock was up 3.3 percent at Rs 396.2 each, while HUDCO and IRFC's stock also gained nearly two percent.
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"Overall, the guidelines are positive for project finance lenders and remove the overhang caused by the May 2024 draft directions," noted Emkay Global.
Citi Research added that the RBI's final directions relax project finance provisioning, favouring lenders. The lower provisioning eases pressure on corporate and PSU bank lenders, as the risk of cost escalation and lender pullback on projects is reduced.
The brokerage said, "In terms of impact, for REC and Power Finance Corp. (PFC), any excess provision, over and above the ECL provision on standard assets (to comply with one percent), will be parked in the ‘Impairment Reserve’, which will be built by transferring the amount from PAT. As a result, there will be no impact on PAT or net-worth, though the regulatory capital (Tier I) will be reduced by this minor impairment reserve."
Emkay Global reiterated its buy call on REC and PFC shares, despite their underperformance since H2FY25 – a de-rating largely driven by moderation in AUM growth. "Despite some near-term growth concerns, the medium-to-long term outlook for the power sector remains strong; within the power sector lending opportunity, the position of REC and PFC remains sturdy."
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