RBI Finalizes Easier Project Financing Guidelines: Impact on IREDA, PFC, REC, PSU Banks
The Reserve Bank of India (RBI) has finalized new project financing guidelines that are significantly easier than the draft proposals. This move is expected to have a positive impact on shares of IREDA, PFC, REC, and PSU banks. The new guidelines reduce the Provision Coverage Ratio (PCR) requirements and introduce a principle-based regime for stress resolution.
RbiProject FinancingPcrPsu BanksFinancial GuidelinesReal Estate NewsJun 20, 2025
As per the finalised guidelines, the Provision Coverage Ratio (PCR) requirement for projects under construction will be set at 1% of the total cost and 1.25% for under construction Commercial Real Estate (CRE) exposures. During the operational phase, the standard provisions will be reduced to 1% for Commercial Real Estate, 0.75% for Commercial Real Estate and Residential Housing, and 0.4% for other project exposures.
Additionally, a principle-based regime for the resolution of stress in project finance exposures will be adopted. This approach is designed to provide more flexibility and tailored solutions for stressed projects, which is expected to benefit the financial health of these companies.
The new regulations are a significant departure from the draft guidelines, which had proposed to increase the Standard PCR to 5% from the current 0.4%, and to set the PCR during the operational phase at 2.5%, which would then come down to 1% if the project achieved certain financial milestones. Analysts had projected that the draft guidelines would have a negative impact on the CET-1 ratio of financiers, anticipating an impact of 200 to 300 basis points for REC, PFC, and IREDA, a 20-30 basis points impact for PSU banks, and a 7-13 basis points impact for private banks.
For Non-Banking Financial Companies (NBFCs) like REC, PFC, IREDA, and IRFC, the additional provisions under the draft guidelines were supposed to be routed through impairment reserves, which would have impacted their regulatory capital. In contrast, the provisions for banks were to be routed through their Profit and Loss (P&L) statements.
The finalised guidelines are expected to draw a positive reaction from PSU banks such as Punjab National Bank (PNB), Central Bank of India, Indian Bank, Bank of Baroda, State Bank of India, and Bank of Maharashtra. These banks are likely to see a reduction in their provisioning requirements, which could improve their financial health and stock performance.
Overall, the RBI's decision to finalize these easier project financing guidelines is seen as a positive move for the financial sector, particularly for state-run project financing companies and PSU banks. The reduced PCR requirements and the principle-based stress resolution regime are expected to provide more stability and flexibility, which could lead to better financial outcomes and investor sentiment.
Frequently Asked Questions
What is the Provision Coverage Ratio (PCR)?
The Provision Coverage Ratio (PCR) is a financial metric that indicates the percentage of the total exposure for which a financial institution has set aside provisions to cover potential losses. It is used to assess the adequacy of provisions against potential defaults.
How have the PCR requirements changed under the new guidelines?
Under the new guidelines, the PCR requirement for projects under construction is set at 1% of the total cost and 1.25% for under construction Commercial Real Estate (CRE) exposures. During the operational phase, the PCR is reduced to 1% for CRE, 0.75% for CRE and Residential Housing, and 0.4% for other project exposures.
What was the impact of the draft guidelines on financial institutions?
The draft guidelines proposed to increase the Standard PCR to 5% from the current 0.4%, and to set the PCR during the operational phase at 2.5%, which would then come down to 1% if the project achieved certain financial milestones. This was expected to have a significant negative impact on the CET-1 ratio of financiers, particularly for REC, PFC, and IREDA.
How will the new guidelines affect PSU banks?
The new guidelines are expected to have a positive impact on PSU banks by reducing their provisioning requirements. This could improve their financial health and stock performance, as they will have more capital to allocate to other areas of their business.
What is the principle-based regime for stress resolution?
The principle-based regime for stress resolution is a flexible approach that allows financial institutions to tailor their resolution strategies based on the specific needs and circumstances of stressed projects. This regime is designed to provide more stability and flexibility in managing stressed assets.
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