Stocks in uptrend: REC, PFC, IREDA up on RBI project finance norm. Do you own any of these?

Stocks in uptrend: Shares of REC, PFC and IREDA gained up to 5% in the morning trade on Friday, June 20. The gains were led by news flow around the Reserve Bank of India (RBI) finalising the project finance norm.

Power Finance Corporation Ltd. was the largest gainer among the three as its share price gained more than 5%. REC share price and IREDA share price rose 3-4% in the morning trade on the BSE today.

Analysts views on revised provisions

The central bank said on Thursday it would require lenders to set aside 1% of the value of loans for under-construction infrastructure projects to cover potential losses. Under the new rules, lenders will also have to set aside 1.25% of the value of loans for under-construction commercial real estate projects.

The rules also limit extensions to project completion deadlines, or the date of starting commercial operations, to three years for infrastructure projects and two years for non-infrastructure projects.

Subsequently, in the operational phase (after commencement of repayment of interest and principal), standard asset provisioning will reduce to 0.4% for project finance, 0.75% for CRE-RH, and 1% for CRE projects.

As per analysts, this rate is significantly less than the 5% provision for under-construction projects, 2.5% for operating projects, and 1% for cash-generation projects suggested in the draft to cover the loan.

Projects that have already secured financing will continue under the existing provisioning regime to ensure a smooth implementation, the RBI added.

As per Motilal Oswal Financial Services (MOFSL), the final guidelines significantly ease the provisioning requirements on standard assets, which were proposed up to 5% in the draft guidelines.

The brokerage added that in its NBFC coverage universe, PFC and REC have the highest proportion of project loans. "In our view, all loans given by PFC and REC would be categorised under project finance, except for the ones given to discoms (under various schemes like RDSS, RBPF and others),” MOFSL said.

More importantly, these guidelines do not prescribe retrospective application to projects that have already reached financial closure, highlighted MOFSL.

(With inputs from agencies)

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