Rating Rationale

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 (86% of the consolidated loan book as on September 30, 2020). PFC is the nodal agency for the development of Ultra Mega Power Projects and the Integrated Power Development Scheme, 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 public sector utilities (PSUs). REC is also the nodal agency for channelling 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. Further, PFC and REC are the lending partners for the recently announced discom package.

GoI remains the majority shareholder, with a stake of 56% as on September 30, 2020. The government supports the company financially and operationally in various ways, including conferring special status to raise capital gains tax exemption bonds. CRISIL believes that 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 with a share of over 30%, and plays a key role in channelling finance to PSUs. The gross consolidated loan book grew by 15% year-on-year to Rs 7.20 lakh crore as on September 30, 2020, from Rs 6.26 lakh crore a year earlier (Rs 6.67 lakh crore as on March 31, 2020). The share of PSUs in the consolidated loan book stood at 86% as on September 30, 2020. Loans outstanding to PSUs on a consolidated basis stood at Rs 6.20 lakh crore as on this date (Rs 5.33 lakh crore a year earlier).

* Adequate capitalisation
As on September 30, 2020, on a standalone basis, tier-I CAR was 14.1% and overall CAR 18.18% as on September 30, 2020, (12.5% and 17.0%, respectively, as on March 31, 2020). Capitalisation is expected to remain adequate over the medium term, supported by a demonstrated ability to raise capital through public issues. The networth to net NPA ratio on a consolidated basis was 4.0 times as on September 30, 2020 and 2.8 times as on March 31, 2020 (4.3 times as on September 30, 2020, and 3.4 times as on March 31, 2020, on a standalone basis for PFC). Accretion to networth is supported by the ability to maintain good interest spreads and a low operating expense ratio. The consolidated return on assets ratio was 2.2% and return on equity were 22.1% for the first half of fiscal 2021 (1.4% and 14.6%, respectively, for fiscal 2020). Ability to contain credit costs and hence improve profitability and capitalisation will remain a key monitorable.

* Adequate resource profile
Borrowing costs are competitive and the resource base, though wholesale, is diversified. The debt instruments have wide market acceptability which is also reflective in its low cost of borrowing compared to peers (7.4% in fiscal 2020). The consolidated resource profile as on September 30, 2020 mainly comprises of bonds (81%) and term loans (18%), and other borrowings (1%). The company also has access to foreign currency borrowing, which comprised 15% of the total consolidated borrowings as on September 30, 2020 (16% as on March 31, 2020) (On a standalone basis, foreign currency borrowings formed 14% of the total borrowings as on September 30, 2020). As per the board approved policy, for exchange rate risks, PFC has hedged 72% of its foreign currency borrowing with residual maturity of up to 5 years, as on September 30, 2020. PFC has also received government approval to raise capital gain bonds under Section 54 EC; which should further support the resource profile.

In fiscal 2017, extra budgetary resources of Rs 5000 crore were raised on behalf of the, GoI. These bonds will be fully serviced by the government through the general budget; hence, a separate government guarantee was not required for issue of these bonds. In its analytical treatment, CRISIL has assumed that PFC will ensure the bonds are serviced on time.

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 86% of its consolidated loan book as on September 30, 2020 to government sector power utilities (including generation, transmission, and discoms). PSUs, 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 PSUs 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 PSU book rose sharply in fiscal 2017 owing to alignment with RBI restructuring norms. However, the downgraded accounts had been paying dues regularly, and a majority of them were upgraded in fiscal 2018. As on September 30, 2020, NPAs (stage III assets as per IND AS) were nil from this portfolio (nil as on March 31, 2020)

PFC (consolidated) also has 14% exposure to private sector power players, which have increasingly become more vulnerable to asset quality risks owing to issues such as lack of fuel availability, inability to pass on fuel price increases, and absence of long-term power purchase agreements for assured power offtake. PFC, on a consolidated basis, had gross NPAs (stage III assets as per IND-AS) of 6.2% as on September 30, 2020 (7.4% as on March 31, 2020). While government sector NPAs declined over previous fiscals, the share of NPAs from the private sector has increased considerably. As on September 30, 2020, 45% of private sector loans have been recognised as stage III assets on which the company has a provision coverage of 58% on a consolidated basis.