Rationale

While arriving at the ratings, ICRA has taken a consolidated view of the credit profiles of Power Finance Corporation Ltd. (PFC) and REC Limited (REC) as REC is a subsidiary of PFC and both entities are in a similar line of business with strategic importance to the Government of India (GoI) and an overlapping clientele. Notwithstanding the ratings of [ICRA]AAA(Stable) and [ICRA]A1+ outstanding on the other borrowing programmes of the company, the one notch lower rating assigned to the perpetual debt programme reflects the specific features of these instruments as per the guidelines issued by the Reserve Bank of India (RBI) for hybrid debt capital instruments. The ratings draw significant strength from PFC's sovereign ownership1 , its importance to the GoI, given its important role as a nodal agency for various power sector schemes, and its dominant market position (including 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 14% of the loan book as on March 31, 2020, at the standalone and consolidated level, respectively). This is reflected by the asset quality indicators with the stage 3 assets at 8.1% and 7.4% of total advances at the standalone and consolidated level, respectively, as of March 31, 2020.