REC, PFC will see no impact on profitability due to draft RBI guidelines, says CLSA

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Companies like REC Ltd. and Power Finance Corporation (PFC) Ltd. will have no impact on their profitability due to the draft RBI guidelines on project financing, brokerage firm CLSA wrote in its note. The overall impact, according to CLSA, will be on their capital adequacy ratios, the brokerage wrote in its note.

CLSA said that PFC and REC’s latest tier-1 ratio stood at 23% and that both companies are well capitalised.

CLSA said that the NBFCs follow IndAs accounting standards and as per the existing rules, the difference in provision requirements between the RBI rules and IndAs will have to be adjusted via the impairment reserves.

Shares of REC, PFC and IREDA fell up to 12% on Monday after the RBI’s draft guidelines on project financing, which called for 5% general provision on all existing and fresh project loans which are in the “construction phase.”

The draft provisioning requirements are well above the current standard provision requirement of 0.4%. You can read more on that here.

CLSA wrote in its note that lenders will now have to maintain a minimum exposure in a consortium and can sell their exposure only after the construction phase is over.

“This, along with higher provision requirements for banks, is a big deterrent, in our view,” CLSA wrote. “Private banks were anyway limited in their participation in thermal and hydro projects and these new regulations may reduce the risk of higher competition from banks in the renewable energy segment as well,” the brokerage added.

When it comes to non-bank lenders like REC, PFC and IREDA, IIFL Securities expects no impact on their Return on Equity (RoE) but expects their tier-1 ratio to be hit by 200 basis points to 300 basis points and also potentially weigh on their valuation multiples.

Shares of REC, PFC and IREDA are off the day’s low, currently trading 5%, 7% and 3% lower respectively.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow