As per the finalised guidelines, the Provision Coverage Ratio (PCR) requirement for projects under construction will be at 1% of the total cost and at 1.25% for under construction CRE (Commercial Real Estate) exposures.
During the operational phase, the standard provisions will be reduced to 1% for Commercial Real Estate, 0.75% for Commercial Real Estate and Residential Housing, and 0.4% for other project exposures.
Additionally, there will also be an adoption of a principle-based regime for resolution of stress in project finance exposures.
These guidelines will come into effect from October 1.
The new regulations are easier in comparison to the draft guidelines, which had proposed to increase the Standard PCR to 5% from the current 0.4%, while the PCR during the operational phase was supposed to be at 2.5% and then come down to 1%, provided the project achieves certain financial milestones.
Analysts had projected the draft guidelines to be negative on the CET-1 ratio of financiers, anticipating an impact of 200 basis points to 300 basis points for REC, PFC and IREDA, a 20-30 basis points impact for PSU Banks and a 7-13 basis points impact for private banks.
For NBFC financiers like REC, PFC, IREDA and IRFC, additional provisions were supposed to be routed through impairment reserves and not through their P&L, which would have impacted their regulatory capital. The provisions for banks, even during the draft guidelines had provisions being routed though their P&L.
“The tightening done by the final guidelines is in the disbursement process,” brokerage firm CLSA wrote in its note. “All regulatory approvals, right of way availability needs to be ensured before lenders can disburse,” the note said further.
CLSA referred to PFC and REC lowering their growth guidance for the current financial year due to right of way or evacuation facility or PPA signing slowdown. The brokerage indicated that the Ministry of Power is looking at the challenges of the power sector ecosystem. “Any solution would be the next positive trigger for both stocks,” according to the note.
CLSA has an high-conviction outperform rating on both REC and PFC. It expects a 35% upside for shares of PFC and a 37% upside for REC.
The finalised guidelines could also draw a reaction from PSU Banks like PNB, Central Bank of India, Indian Bank, Bank of Baroda, State Bank of India and Bank of Maharashtra.
(Details compiled by Gaurav Jawalkar)
