Rationale

The ratings continue to draw significant strength from Power Finance Corporation Ltd.'s (PFC) sovereign ownership1 , its importance to the Government of India (GoI), given its important role as a nodal agency for various power sector schemes, and its dominant market position (including its subsidiary – REC Limited (REC)) in the power sector financing segment. The ratings also continue to draw comfort from PFC's healthy financial flexibility by virtue of its ownership and adequate profitability profile. These strengths are partly offset by the company's exposure to a single sector (i.e. power) with a high concentration towards state power utilities, as well as the vulnerability of its exposure to private sector borrowers (17% and 15% of the loan book as on December 31, 2019, at the standalone and consolidated level, respectively), as reflected by the asset quality indicators with stage 3 assets at 8.3% and 7.4% of total advances at the standalone and consolidated level, respectively, as of December 31, 2019. ICRA notes that while PFC's capitalisation level was characterised by comfortable Tier I capital of 15.95% as of December 31, 2018, the cushion over regulatory levels declined with Tier I capital at 11.73% as of March 31, 2019 post the acquisition of the GoI's stake in REC by PFC in March 2019. The acquisition impacted the company's capitalisation level as it has to knock off its investment (in excess of 10% of its net owned funds (NOF)) in REC from its NOF, for capital adequacy calculations. Nevertheless, the capitalisation level remained above the regulatory threshold of 10% and is improving steadily as also seen in 9M FY2020 with the Tier I improving to 14.37% as on December 31, 2019.