Shares of REC Ltd., Power Finance Corporation Ltd. (PFC), and IREDA Plunge Due to RBI Regulations

On May 6th, the shares of REC Ltd., Power Finance Corporation Ltd. (PFC), and Indian Renewable Energy Dev Agency (IREDA) experienced a sharp decline following the release of draft guidelines by the Reserve Bank of India (RBI) concerning project financing. This article delves into the reasons behind this plunge and the implications for these power sector financiers.

Shares Plummet on RBI Guidelines

The steep fall in the share prices of REC Ltd. and PFC on May 6 sent shockwaves through the market as investors reacted to the RBI's proposal of a 5 percent general provision for existing and fresh project loans in the construction phase. The guidelines, if implemented, will impact both banks and non-bank lenders, including REC and PFC, which play a crucial role in financing power projects across the country.

Impact on REC and PFC

REC Ltd. witnessed a significant drop of 10 percent in its stock price, marking its largest single-day decline in eight months. Similarly, PFC's shares tumbled over 11 percent, registering its biggest drop since 2020. The implications of these regulations are not limited to the profit and loss statements of these companies but also extend to their capital adequacy ratios.

Expert Analysis

Analysts have weighed in on the potential effects of the RBI guidelines on project financiers like REC, PFC, and IREDA. CLSA noted that the higher standard asset provisions may not directly impact the P&L but could affect their capital ratios. IIFL Securities predicted a hit on the tier-1 capital ratio of these lenders and a possible decrease in their valuation multiples. JM Financial highlighted the increased provisioning requirement as a barrier to growth in infrastructure sectors.

The recent fall in the shares of REC Ltd., Power Finance Corporation Ltd. (PFC), and IREDA reflects the market's response to the proposed RBI guidelines on project financing. While these regulations aim to strengthen risk management practices, they may have wider implications for the growth and profitability of power sector financiers. Understanding these changes and their impact is crucial for investors and stakeholders in the energy industry.