Why shares of REC, PFC, and IREDA declined as much as 12% on Monday: Here are the details

Stock movement:

Shares of REC Ltd. and Power Finance Corporation Ltd. (PFC) have dropped by as much as 12% on Monday, erasing most of the gains they made last week. Both stocks had reached very high records in the previous week.

IIFL Securities mentioned in a note that, "The draft RBI guidelines on project finance could potentially affect the valuation multiples of stocks such as REC, PFC, and IREDA."

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Reason for decline:

The decline follows the release of Reserve Bank of India's draft guidelines on project financing.

These guidelines propose a 5% general provision on all existing and fresh project loans during the construction phase as well, and it is also applicable to both banks and non-bank lenders as well.

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Non-bank lenders:

The provision requirement also extends to standard project loans for infrastructure and non-infrastructure projects as well, including real estate also.

For non-bank lenders like REC, PFC, and IREDA, while there may be no impact on Return on Equity (RoE), their tier-1 ratio could be affected by 200 to 300 basis points, potentially impacting their valuation multiples.

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Phased implementation:

The draft guidelines suggest a phased implementation of the 5% provisioning requirement, with 2% from March 2025, 3.5% from March 2026, and 5% from March 2027.

IIFL Securities estimates that the additional provisioning requirement could range between 0.5% to 3% of the banks' net worth, impacting their CET-1 ratio by 7 to 30 basis points.

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Stock reactions:

REC: The stock is down by 8%, marking its largest single-day decline in eight months and ending a nine-day winning streak.

PFC: The stock is down by as much as 12%, marking its biggest single-day drop since 2020 and snapping a four-day winning streak.

IREDA: The stock is down by 6%, extending its losses and marking its largest single-day drop since December last year.

We recommend investors to approach with experts before investing in any companies.