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Companies like REC Ltd. and Power Finance Corporation (PFC) Ltd. will not experience any impact on their profitability due to the draft RBI guidelines on project financing.
CLSA, a brokerage firm, stated in a note that the overall impact will be on their capital adequacy ratios.
CLSA highlighted that both PFC and REC have a tier-1 ratio of 23% and are adequately capitalized.
Non-banking financial institutions (NBFCs) adhering to IndAS accounting standards will adjust any difference in provision requirements between RBI rules and IndAs through impairment reserves.
The draft guidelines introduced by RBI require a 5% general provision on all existing and fresh project loans in the construction phase, which is significantly higher than the current standard provision requirement of 0.4%.
CLSA believes that the higher provision requirements and the requirement for lenders to maintain minimum exposure in a consortium will deter private banks from participating in thermal and hydro projects.
Additionally, these regulations may reduce the risk of increased competition from banks in the renewable energy segment.
IIFL Securities anticipates that non-bank lenders like REC, PFC, and IREDA will not face any impact on their Return on Equity (RoE).
However, their tier-1 ratio may be affected by 200 to 300 basis points, potentially influencing their valuation multiples.
Shares of REC, PFC, and IREDA have recovered from their lows but remain lower by 5%, 7%, and 3%, respectively.
Source: REC, PFC will see no impact on profitability due to draft RBI guidelines, says CLSA