Shares of REC, PFC and IREDA – the leading non-banking financing corporations in the power sector – tanked as much as 12% in the initial trade on Monday after the Reserve Bank of India said last week, in its draft guidelines that lenders must maintain a provision of 5% for loans extended to under-construction projects.
REC closed 7% lower at Rs 516.65 per share while that of PFC ended 9% down at Rs 437.55 per share. IREDA shares closed down by 4%.
According to analysts at CLSA, “This, along with higher provisioning requirement for banks, is a big deterrent, in our view,” CLSA said, adding that private banks were anyway shy in participating in hydro projects and the move will reduce competition in the renewable segments as well.
IIFL Securities shared similar views. While it does not expect any impact on the Return on Equity (RoE) of non-bank lenders like REC, PFC and IREDA, it expects their tier-1 capital ratio to be hit by 200-300 basis points (bps). It may also potentially weigh on their valuation multiples, it noted.
Indian Renewable Energy Development Agency (IREDA) on Monday said that RBI’s draft guidelines on lenders’ project finance operations, if implemented, will not affect the company profitability but have marginal impact on its capital position.
“Profit after tax (PAT) is expected to be largely unaffected, while there may be marginal impacts on net worth and capital adequacy ratio (CRAR). However, with our currently healthy CRAR levels, any marginal impact can be accommodated accordingly,” said Pradip Kumar Das, Chairman & Managing Director, IREDA.
Das said that IREDA is likely to face limited impact due to its existing higher provisioning standards, but lenders with higher exposure to under-construction projects with long gestation periods—including general infra, fossil fuel–in their asset under management (AUM) and the ones exclusively following RBI’s provisioning norms are likely to be highly impacted.
“Our portfolio largely consists of commissioned projects already in the operational phase, thereby limiting the impact of additional provisioning requirements.” Das said.
Analysts believe that the proposed guidelines will likely have no impact on the power finance companies’ profitability but on their capital position. “The overall impact on PFC and REC from higher standard assets will not be on their P&Ls but on capital adequacy ratios,” CLSA said, adding that PFC’s and REC’s latest tier-1 ratio stood at 23%, which is well above regulatory requirements.
According to the RBI’s proposal last Friday, lenders must maintain a provision of 5% for loans extended to under-construction projects. The provisions can be made gradually in phases till FY27. Once the project enters the operational phase, the provisions can be reduced to 2.5% of the funded loans. It can be further reduced to 1% of the funded outstanding provided that the project has acheived certain business scale.
Further, for projects financed under lenders’ consortium arrangements, where the aggregate exposure of the participant lenders to the project is up to Rs1,500 crore, no individual lender should have an exposure less than 10% of the aggregate exposure. For projects where aggregate exposure of lenders is more than Rs 1,500 crore, this individual exposure floor shall be 5% or Rs 150 crore, whichever is higher.
The lender can sell their exposure in the consortium loan only happen when the construction phase ends.
