Shares of key state-run project financing companies surged on Friday, June 20, after the Reserve Bank of India (RBI) released its much-awaited final guidelines for project finance—a move seen as far more lenient than the earlier draft.
Power Finance Corporation Ltd. (PFC) led the rally with gains of nearly 6%, while REC Ltd. rose 3.3%. HUDCO and IREDA also traded in the green, gaining around 3% and 1.5% respectively. Investors responded positively to the more favourable provisioning norms, which ease the regulatory burden on project financiers.
What’s New in the RBI’s Final Guidelines?
Under the new framework:
- For projects under construction, the Provision Coverage Ratio (PCR) has been set at:
- 1% of total project cost.
- 1.25% for under-construction Commercial Real Estate (CRE) projects.
- Once projects enter the operational phase, provisioning drops to:
- 1% for CRE,
- 0.75% for CRE + Residential Housing,
- 0.4% for other types of project exposures.
- The RBI has also introduced a principle-based approach for resolving stress in project finance exposures.
These guidelines will come into effect from October 1, 2025.
A Positive Shift from Earlier Proposals
The final norms are significantly more lenient than the draft guidelines, which had proposed a steep 5% standard PCR (up from 0.4%) and a 2.5% PCR during the operational phase—scenarios that had sparked investor concern. Analysts had warned that such aggressive provisioning could hit the CET-1 capital of financiers like REC, PFC, and IREDA by 200–300 basis points.
Under the draft, NBFCs like REC and PFC were expected to absorb provisions through impairment reserves, potentially eroding regulatory capital without hitting the P&L. For banks, however, all provisioning would hit profits directly—an added burden.
CLSA: “The Real Tightening Is in the Disbursement Phase”
In a note, brokerage CLSA highlighted that the RBI has focused its tightening efforts on the loan disbursement process rather than provisioning. Now, before lenders release funds, all regulatory approvals and infrastructure clearances—such as right of way, power evacuation, and power purchase agreements (PPAs)—must be secured.
CLSA also noted that both PFC and REC have recently trimmed growth forecasts due to delays in approvals, indicating that while capital norms are now easier, execution challenges remain.
Still, the brokerage remains bullish, with a high-conviction “outperform” rating on both stocks, projecting 35% upside for PFC and 37% upside for REC.
Broader Sector Impact
The revised norms could also spark a reaction in PSU banks such as PNB, Central Bank of India, Indian Bank, Bank of Baroda, SBI, and Bank of Maharashtra, given their exposure to infrastructure lending.
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