Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to and majority ownership by GoI

The company plays a major role in implementing government policies, and is important for financing India's power sector, particularly government sector power utilities (87% of the consolidated loan book as on September 30, 2023). PFC is the nodal agency for the development of ultra-mega power projects and the integrated power development scheme, RDSS and LPS and is also the bid process coordinator for the Independent Transmission Projects scheme. It plays a developmental role in channelling finance to meet the power sector's large funding requirement, particularly of state power utilities (SPUs). PFC and REC is also the nodal agency for channeling finance towards the rural electrification programme under the Deendayal Upadhyaya Gram Jyoti Yojana (formerly known as Rajiv Gandhi Grameen Vidyutikaran Yojana) and Pradhan Mantri Sahaj Bijli Har Ghar Yojana, or Saubhagya scheme, and the National Electricity Fund Scheme. PFC and REC are the lending partners for the announced discom package. In fiscal 2022, GoI announced LPS to address dues of discoms to generation and transmission companies. PFC has extended financial assistance (disbursed Rs 31,508 crore as of September 30, 2023) to various discoms under the rules, to clear their outstanding dues. PFC shall also act as the nodal agency to monitor implementation of these rules.

GoI remains the majority shareholder, with a stake of 56% as on September 30, 2023. The government supports the company financially and operationally in various ways, including conferring special status to raise capital gains tax exemption bonds. GoI has strong strategic reasons and a moral obligation to support PFC, both on an ongoing basis and in the event of distress, given the latter's role in implementing the government's power sector policies and GoI's majority ownership in the company.

Dominant market position in the power financing segment

PFC plays an important role in the Indian power sector, not only by providing finance but also by implementing GoI's power sector policies. The company, at a consolidated level, is the largest lender to the power sector and plays a key role in channeling finance to SPUs . The gross consolidated loan book grew by 20% year-on-year to Rs 9.24 lakh crore as on September 30, 2023, from Rs 7.71 lakh crore a year earlier (Rs 8.57 lakh crore as on March 31, 2023). The share of SPUs in the consolidated loan book stood at 87% as on September 30, 2023. Loans outstanding to SPUs on a consolidated basis stood at Rs 8.0 lakh crore as on this date.

Adequate capitalisation

As on September 30, 2023, on a standalone basis, Tier-I CAR and overall CAR stood at 22.35% and 24.86%, (21.61% and 24.37%, respectively, as on March 31, 2023). Capitalisation is expected to remain adequate over the medium term, supported by a demonstrated ability to raise capital through public issues. Networth to net NPA ratio on a standalone basis for PFC is 15.9 times as on September 30, 2023; 15.1 times as on March 31, 2023. Accretion to networth is supported by the ability to maintain stable interest spreads and a low operating expense ratio and provision costs. The standalone return on assets ratio was 2.8% and return on equity were 18.2% for the fiscal 2023 (2.5% and 17.9%, respectively, for fiscal 2022). Ability to contain credit costs and hence improve profitability and capitalisation will remain a key monitorable.

Sufficient resource profile

Borrowing costs are competitive and the resource base, though wholesale, is diversified. Debt instruments have wide market acceptability, which is also reflective in its average cost of borrowing compared to peers (7.3% for half year ended September 30, 2023). The standalone resource profile as on September 30, 2023, comprises bonds (62%), term loans (18%), and other borrowings (2%). The company also has access to foreign currency borrowing, which comprised 18% of the total borrowing as on the same date. As per the board-approved policy for exchange rate risks, PFC has hedged 83% of its total foreign currency borrowing (91% hedged with residual maturity of up to five years) as on September 30, 2023. The company has also received government in 2017 approval to raise capital gain bonds under Section 54 EC, which further support the resource profile.

Weakness:

Inherent vulnerability in asset quality, and significant sectoral and customer concentration

PFC's asset quality remains inherently vulnerable to the weak credit risk profiles of borrowers. The company caters only to the power sector, with 87% of its consolidated loan book as on September 30, 2023, to government sector power utilities (including generation, transmission, and discoms). SPUs, especially discoms, are an inherently weak asset class because of their poor financial risk profiles. Effective execution of various reform measures is extremely critical for SPUs to produce the desired positive impact, and broad-based political consensus is necessary to implement the much-needed tariff increases to ensure sustained improvement in their performance. NPAs and restructured assets from the SPUs book had risen sharply in fiscal 2017 owing to alignment with the restructuring norms of Reserve Bank of India. However, the downgraded accounts had been paying dues regularly, and a majority of them were upgraded in fiscal 2018. Furthermore, various dispensation schemes by the GOI such as RDSS and LPS have also helped support asset quality for these exposures. Accordingly, NPAs (stage III assets as per IND AS) remained nil from this portfolio (nil as on September 30, 2023)

PFC (consolidated) also has 13% exposure to private sector power players, which have remained vulnerable to asset quality risks historically due to issues around fuel availability, challenges with passing on fuel price increases and absence of long term power purchase agreements. However, due to steady progress in resolution of stressed assets, PFC’s asset quality has been on an improving trend with gross NPAs (stage III assets as per IND-AS) of 3.4% as on September 30, 2023 (4.4% as on September 30, 2022), all from its private sector book (on a consolidated basis). As on September 30, 2023, 25% of private sector loans have been recognised as stage III assets on which the company has a provision coverage of 71% on a consolidated basis.