PFC, REC well-placed under new RBI norms; Motilal Oswal reiterates buy rating
India's NBFC sector has received a significant regulatory clarity boost with the RBI's final guidelines on project finance.
ADVERTISEMENT These revised norms, applicable to loans sanctioned on or after 1st October 2025, are notably milder than the earlier draft, particularly concerning provisioning requirements.
The new rules adopt a principle-based approach for resolution and standardize guidelines across regulated entities, aiming to facilitate smoother implementation without disrupting existing frameworks.
One of the most crucial aspects of the final guidelines is that they are not retrospective. Loans to under-construction projects that have already achieved financial closure will continue to follow the extant provisioning norms, protecting lenders from any sudden balance sheet strain.This ensures that the transition to the new regime remains orderly. For new under-construction project loans, the standard asset provisioning has been eased to 1% and 1.25% for commercial real estate (CRE) loans, significantly lower than the 5% proposed earlier.Once projects become operational, the provisioning requirement drops further—to 0.4% for general project finance, 0.75% for CRE-RH, and 1% for CRE.
ADVERTISEMENT In addition, rationalization of delays in project timelines has been introduced, allowing up to three years for infrastructure projects and two years for non-infrastructure projects.However, specific additional provisioning will be required for projects availing deferments, though this will be reversed once operations commence.
ADVERTISEMENT These provisions strike a balance between prudence and flexibility, supporting long-gestation infrastructure financing without unduly burdening lenders.NBFCs with exposure to project finance—particularly those operating in infrastructure, real estate, or wholesale finance—will see a manageable rise in provisioning burden from October 2025 onward.
ADVERTISEMENT Lenders are expected to pass on a part of this increase to borrowers through pricing adjustments, minimizing profitability impact. Moreover, many large project financiers already carry sufficient standard asset provisions, further limiting downside risk.Overall, the final guidelines are a constructive development for the NBFC sector. They ensure financial stability while supporting India's infrastructure build-out and align regulatory expectations with practical business challenges.
ADVERTISEMENT The sector remains on stable footing, with improved visibility and a favorable risk-reward profile in project finance.REC reported healthy performance in FY25, with a 5% YoY PAT growth in 4QFY25 supported by one-offs in interest income.While loan growth guidance has been revised to 12–13% due to elevated prepayments, spreads improved ~70bp QoQ and NIMs remained steady at 3.63%.Asset quality strengthened, with GS3 at 1.35% and a target of net-zero NPAs by FY26. Under the revised RBI project finance guidelines, REC remains well cushioned with Stage 1 and 2 provisioning at 0.95%.We model FY25–27 PAT CAGR of 11%, RoA/RoE of 2.6%/20%, and a ~5.7% dividend yield by FY27.PFC delivered strong operational performance in FY25, with 20% YoY PAT growth to INR 173.5b, driven by healthy disbursements, improved asset quality, and a INR 12b write-back from the KSK Mahanadi resolution.The final RBI guidelines on project finance are favorable, with lower provisioning norms and no retrospective application. PFC is well placed under the revised framework, with Stage 1 and 2 provisioning at 1.13% as of Mar'25.We estimate an FY25–27 PAT CAGR of 8%, RoA/RoE of 3%/18%, and a dividend yield of ~5% in FY27E.
(The author is Head – Research, Wealth Management, Motilal Oswal Financial Services Ltd.)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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