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RBI's stricter project finance guidelines: Impact on IREDA, REC, and PSU banks

This is how the Reserve Bank of India's tightened project finance regulations have affected shares of key players.

RBIs stricter project finance guidelines: Impact on IREDA, REC, and PSU banks

The Reserve Bank of India's (RBI) recent announcement of a stricter project finance framework has sent ripples through the stock market, particularly impacting the shares of key players in the sector. Among those affected are the Indian Renewable Energy Development Agency (IREDA), Rural Electrification Corporation (REC), and various Public Sector Undertaking (PSU) banks. Let's take a look into the implications of this move and its repercussions on these entities.

IREDA, REC, and PFC shares plummeted by 4.06%, 7.29%, and 8.20%, respectively, following the RBI's stricter project finance guidelines. Under the new rules, lenders are required to make 5% provisions on project loans during the construction phase, which is a significant increase from the previous standard of 0.4%. Once projects become operational, provisions can be reduced to 2.5%, and further to 1% when the project generates sufficient cash flow to cover its obligations and the long-term debt decreases by 20%.

The tightened lending criteria aim to enhance project viability and necessitate an increase in standard asset provisioning from 0.4% to 1-5% of loans gradually. While this impacts all lenders, NBFCs following IndAS accounting standards need to adjust the difference in provision requirements between RBI rules and IndAS through impairment reserves. Domestic brokers estimate that banks may face additional provisions of 0.5-3% of net worth, affecting their CET1 ratio, particularly higher for PSU Banks. For NBFCs, the impact won't be on the P&L, but on impairment reserves, potentially affecting capital ratios. Infra NBFCs like REC, PFC, and IREDA could see a significant hit to their capital ratio, impacting their valuation by 8-13%.

The recent drop in shares of IREDA, REC, and PSU banks following the RBI's stricter project finance framework reflects the market's immediate response to regulatory changes. While challenges lie ahead for these entities, the regulatory measures are aimed at strengthening the financial system and promoting sustainable growth in key sectors. Adapting to the new paradigm will require agility, innovation, and a concerted effort from all stakeholders to navigate through these turbulent times and emerge stronger in the long run.

Divya Shivaji
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