Why shares of REC, PFC, IREDA declined as much as 12% on Monday: Explained

Shares of REC Ltd., Power Finance Corporation Ltd. (PFC) are down as much as 12% on Monday and have given up most of the gains they made last week. Both stocks had hit a record high in the week gone by.

The move comes after Reserve Bank of India’s draft guidelines on project financing, which mentioned that 5% general provision should be made on all existing and fresh project loans which are in the “construction phase,” meaning before commercial operations commence.

These guidelines are proposed to be applicable on both banks as well as non-bank lenders. The provisioning requirement will be on ‘standard’ project loans for both infra and non-infra project, and project loans towards real estate.

RBI’s draft guidelines further stated that the standard provisions on project loans can be reduced to 2.5% once the projects are operational and can be further reduced to 1% of the funded outstanding once the project has positive net operating cash flow that is sufficient to cover the current payment obligations and the long-term debt of the project has declined by at least 20% with lenders.

The draft provisioning requirements are well above the current standard provision requirement of 0.4%. They also propose a phased implementation of the 5% provisioning:

• 2% with effect from March 2025 (spread over four quarters of financial year 2025)
• 3.5% with effect from March 2026 (spread over four quarters of financial year 2026)
• and 5% with effect from March 2027 (spread over four quarters of financial year 2027)

Brokerage firm IIFL Securities wrote in a note that it estimates additional provisioning requirement to be between 0.5% to 3% of the banks’ net worth and may hurt their CET-1 ratio by 7 basis points to 30 basis points.

When it comes to non-bank lenders like REC, PFC and IREDA, IIFL Securities expects no impact on their Return on Equity (RoE) but expects their tier-1 ratio to be hit by 200 basis points to 300 basis points and also potentially weigh on their valuation multiples.

Here’s how stocks are reacting to this move:

• REC: Stock is down 8%, marking its biggest single-day drop in eight months. The stock has also snapped a nine-day winning streak.
• PFC: Stock is down as much as 12%, marking its biggest single-day drop since 2020. The stock has snapped a four-day winning streak.
• IREDA: Is extending losses and is down 6%, marking its biggest single-day drop since December last year.