Shares of public sector project finance firms rallied on Friday, June 20, after the Reserve Bank of India (RBI) released its final guidelines on project financing, offering relief to lenders through softer provisioning norms.
The RBI, on June 19, issued its final directions, asking banks to maintain a general provision of 1.25% on Commercial Real Estate (CRE) loans during the construction phase. For Commercial Real Estate-Residential Housing (CRE-RH) and other types of project finance during the construction stage, banks must set aside 1% in provisions.
Once the projects become operational and repayment begins, the provisioning requirement drops. Banks will need to hold 1% for CRE projects, 0.75% for CRE-RH, and only 0.40% for other projects.
These final norms are significantly softer than those proposed in the draft guidelines issued in May 2024, which had recommended a much higher 5% provision on under-construction projects. The final rules ease the burden on lenders, especially public sector banks and corporate lenders.
Following the announcement, shares of Indian Renewable Energy Development Agency (IREDA) rose 1.7% to ₹161.45. Power Finance Corporation (PFC) surged 3.7% to ₹404.60, REC Ltd gained 3.3% to ₹396.20, while HUDCO and Indian Railway Finance Corporation (IRFC) also saw gains of nearly 2%.
Brokerage firm Emkay Global said the final guidelines remove the uncertainty caused by the earlier draft and are broadly positive for project finance lenders.
Citi Research echoed this view, stating that the relaxed norms ease pressure on lenders by lowering the risk of cost overruns and funding pullback during the construction phase.
Citi also noted that for firms like REC and PFC, any extra provision above the Expected Credit Loss (ECL) requirement would be transferred to an ‘Impairment Reserve’ from their profit after tax (PAT). This reserve will not impact the PAT or net worth but will slightly reduce Tier I regulatory capital.
Despite recent underperformance in the second half of FY25 due to slower asset growth, Emkay Global maintained a ‘buy’ rating on REC and PFC. The brokerage added that the long-term outlook for the power sector remains strong, and both lenders are well-positioned to benefit from continued sectoral demand.
