The Reserve Bank of India’s latest move on project financing has sparked a rally in power sector financiers. The revised rules are notably softer than expected, offering relief to lenders and investors alike. While the finer details reveal deeper implications, the shift clearly marks a positive turn for infrastructure funding.
New RBI Rules
Shares of power sector financiers like PFC (6.3%), REC (4.4%), and IREDA (4%) rose after the RBI announced easier project financing rules. These final guidelines are less strict than the earlier draft proposal, which had suggested higher provisioning requirements that would have hurt the financials of lenders like PFC and REC.
Now, during the construction phase, financiers must keep just 1% of the project cost aside as a safety buffer (called Provision Coverage Ratio or PCR) and slightly more for commercial real estate. In the operational phase, the required buffer is even lower, as little as 0.4% for some projects. This is a big relief compared to the earlier draft that suggested a buffer of 5%.
How Does This Affect PSU Banks and NBFCs?
Impact on PSU Banks
The final norms are much easier than the draft, so the pressure on PSU banks like SBI, PNB, BoB, and Indian Bank is now lower. Earlier, they would have had to set aside more money (provisions) from their profits (P&L), which would reduce their earnings.
Now, with lower provisioning requirements, their capital and profitability stay healthier. However, any provisions they made for potential loan losses are supposed to go through their P&L statement. This means the provisions would directly reduce their reported profits.
Furthermore, banks still need to follow strict disbursement rules, like ensuring all approvals and infrastructure (like land access) are in place before funding projects.
Impact on NBFCs
NBFCs were expected to take a bigger hit under the draft rules, as extra provisions would go through impairment reserves, affecting their regulatory capital. However, the new final norms significantly reduce this burden, allowing NBFCs to maintain stronger capital ratios.
This also improves their ability to lend and could support future growth. But project delays due to issues like land acquisition and power purchase agreements (PPAs) still pose challenges to disbursements.
Written By Fazal Ul Vahab C H
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