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In yesterday's trading session, the shares of REC and PFC initially plunged up to 12% post-RBI's draft guidelines. The proposed 5% general provision exceeds the current 0.4% standard. However, stocks recovered later, following CLSA's optimistic outlook.
CLSA reassured that there will be minimal impact on REC and PFC's profitability despite RBI's draft guidelines. Both companies boast a healthy tier-1 ratio of 23%, ensuring resilience.
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RBI's draft guideline proposes stricter provisioning requirements and limits lenders' exposure in consortiums until project operationalisation. Private banks may face reduced competition in renewable energy projects due to these regulations.
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IIFL Securities predicts a 200-300 basis points hit on tier-1 ratios for REC and PFC, potentially affecting valuation multiples. However, RoE is expected to remain unaffected.
CLSA emphasises that higher provisions will impact impairment reserves but not drag down profits for REC and PFC, given their robust capitalisation. The proposed changes align with RBI's aim to strengthen project financing regulations.
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RBI has solicited feedback on the proposal until June 2024. Despite initial market jitters, confidence in REC and PFC's resilience remains high, with both stocks showing significant gains over the past year.
Sources:
https://www.cnbctv18.com/market/rec-pfc-share-price-no-impact-profitability-clsa-capital-adequacy-rbi-draft-rules-19407026.html
https://www.moneycontrol.com/news/business/stocks/rec-pfc-to-see-minimal-impact-from-rbi-draft-norms-says-clsa-stocks-show-mild-recovery-12715466.html
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