Rating Rationale

Strengths
* Strategic importance to and majority ownership by GoI
The company's high strategic importance to GoI is reflected in the role it plays in implementing government policies, and its importance in financing India's power sector, particularly government sector power utilities (PSUs, includes state (65%), central (7%) and joint (9%) power undertakings). PFC is the nodal agency for the development of Ultra Mega Power Projects (UMPPs) and the Integrated Power Development Scheme (IPDS), and is also the bid process coordinator for the Independent Transmission Projects (ITP) scheme. The company plays a developmental role in channelling finance to meet the power sector's large funding requirement, particularly of PSUs, which constitute 83% of its portfolio. GoI remains the majority shareholder, with a stake of 61.48% as on December 31, 2018. 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 is the largest lender to the power sector with a share of over 20%, and plays a key role in channelling finance to PSUs. The share of PSUs in the loan book stood at 83% as on December 31, 2018 (82% as on September 30, 2018). Loans outstanding to PSUs stood at Rs 2.98 lakh crore as on December 31, 2018. Additionally, PFC is the nodal agency for UMPP and the IPDS.

* Adequate capitalisation
As on December 31, 2018, tier-I capital adequacy ratio (CAR) was 15.95%, overall CAR 18.95%, and net worth (share capital and all reserves) Rs 40932 crore, against 17.66%, 20.75% and Rs 37,198 crore, respectively as on December 31, 2017. PFC has raised Tier II capital of Rs 5400 crore in March 2019, factoring in the same, the capital ratios are expected to remain in compliance with regulatory requirements of 10% and 15%of Tier I and overall CAR respectively for NBFC-IFCs. Capitalisation is expected to remain adequate over the medium term, supported by a demonstrated ability to raise capital through public issues. The net worth to net NPA ratio was 3.0 times as on December 31, 2018 (2.8 times as on September 30, 2018). Accruals to networth is supported by ability to maintain good interest spreads and a low operating expense ratio. The return on assets ratio was 2.2% (annualised) in the first nine months fiscal 2019 (2.1% in fiscal 2018). However, profitability will remain susceptible to increase in credit costs because of weakening in asset quality in the private sector exposures.

* Adequate resource profile
Borrowing costs are competitive and the resource base, though wholesale, is diversified. The debt instruments have wide market acceptability and borrowing is typically at low spreads over government securities. The cost of borrowing is lower than that of peers, and was 7.8% for fiscal 2018 (8.1% for fiscal 2017). The resource profile as on December 31, 2018 mainly comprises of bonds (80%) and term loans (17%), and other borrowings form 3% of the total resource pool. The company also has access to foreign currency borrowing, which comprised 12% of the total resources as on December 31, 2018 (8% as on March 31, 2018). It hedges only a limited portion of its foreign currency borrowing based on its board-approved policy. The company 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 83% of its advances 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. Loans to discoms accounted for 22% of overall advances, including transition funding. 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 the performance of PSUs. 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 December 31, 2018, NPAs (stage III assets as per IND AS) are nil from this portfolio.

PFC also has 17% 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 reported gross NPAs (stage III assets as per IND-AS) of 9.47% as on December 31, 2018 against 5.71% a year ago and 9.67% as of September 30, 2018. While government sector NPAs declined over previous year, the share of NPAs from private sector has increased considerably. As on December 31, 2018, ~55 % of private sectors loans have been recognized as stage III assets. PFC has made provisions of 52% against the stage III assets.