Here is why shares of REC, PFC and IREDA are falling today

Shares of REC Ltd, Power Finance Corporation Ltd (PFC) and Indian Renewable Energy Development Agency Ltd (IREDA) fell up to 12 per cent in Monday's trade amid fears of tighter project finance norms. Analysts noted that the Reserve Bank of India (RBI) has issued a draft harmonised prudential framework for lenders who undertake project finance. The framework proposed to tighten certain lending criteria, which should improve the project viability and increase standard asset provisioning to 1-5 per cent of loans from current 0.4 per cent in a phased manner. 

IIFL Securities said the additional provisioning requirement to be 0.5-3 per cent of banks’ networth and hurt their CET1 ratio by 7-30 basis points (bps). For infra-NBFCs such as REC, PFC and IREDA, it should have no return on equity (RoE) impact, but can impact their Tier 1 ratio by 200-300 basis points, and also potentially weigh on their valuation multiples, IIFL Securities said.

The draft guideline is applicable for all lenders but NBFCs follow IndAS accounting. As per existing rules, the difference in provision requirement between the RBI rules and IndAS need to be adjusted via impairment reserves. 

CLSA said the overall impact on PFC and REC from higher standard asset will not be on their P&Ls but on capital adequacy ratios. PFC and PEC's latest Tier 1 stood at 23 per cent, CLSA said adding that they are well-capitalised. 

"Valuation of these NBFCs can also be potentially impacted as the adjusted networth will be 8-13 per cent lower," IIFL Securities said. 

Shares of PFC plunged 12.40 per cent to hit a low of Rs 420.85 on BSE. REC shaes were down 5.58 per cent at Rs 526.55. The IREDA stock slipped 3.73 per cent to Rs 172.90.

IIFL Securities sees  minimum 10 per cent exposure requirement will limit the opportunities for smaller players. 

"Impact of higher standard asset provisioning norms for banks: estimate additional provision requirement of 0.5-3 per cent of networth, and CET1 ratio hit of 7-30bps (higher for PSU banks); for NBFCs: additional provisions will not be routed through P&L, but instead will be apportioned to the impairment reserve (cannot be included in the capital ratio and NNPA calculations)," it said. 

As per the proposed criteria, individual lenders in the consortium for projects with aggregate exposure up to Rs 1,500 crore should not have over 10 per cent.  Also, financial closure is to be achieved and DCCO is to be documented prior to fund disbursement. The maximum moratorium allowed is six months beyond DCCO. 

"Provisioning for standard assets: 5 per cent PCR during construction phase has been reduced to 2.5 per cent once project reached operational phase, and further reduced to 1 per cent provided the project achieves certain financial benchmarks," IIFL noted.