Rationale

The revision in the rating outlook factors in the improvement in Indian Renewable Energy Development Agency Limited's (IREDA) credit profile with increased business volumes, moderation in the asset quality indicators supported by lower slippages and recoveries from stressed accounts over the past two years and the expectation of further improvement, and the consequent improvement in the earnings profile on a sustained basis. Further, ICRA takes note of the improvement in the solvency and capitalisation profile supported by the latest capital infusion of Rs. 1,500 crore by the GoI in March 2022. The equity infusion would also improve IREDA's competitive positioning further, in terms of being able to take higher exposures, and hence support its growth going forward. Moreover, it will provide adequate cushion to act as a key mitigant against portfolio vulnerability. The ratings factor in IREDA's sovereign ownership (100% held by the Government of India - GoI), its strategic importance as the nodal agency for the promotion and implementation of Government policies and initiatives in the renewable energy (RE) sector, and its presence in the RE space. The ratings also consider IREDA's strong liquidity position, supported by a large proportion of significantly long-term borrowings that is commensurate with the long-term nature of its assets, and its ability to mobilise funds at competitive rates from diverse sources owing to its sovereign ownership. The ratings also factor in the high portfolio vulnerability, given the wholesale nature of the exposures, which keeps the concentration risk high for the company. The top 20 borrowers accounted for 296% of the net worth as on March 31, 2022 (352% as on March 31, 2021). ICRA also notes that by virtue of its mandate, IREDA would continue to have sectoral concentration with the portfolio largely comprising RE exposures, though it is well diversified across sectors such as wind, solar, biomass, cogeneration and small hydro. Going forward, IREDA's ability to recover from stressed assets, control slippages on vulnerable assets and grow the loan book profitably would be the key rating sensitivity. ICRA believes IREDA will remain important to the GoI and will play a major role in various GoI renewable sector schemes, especially considering the increased importance of RE in the overall global landscape. A significant dilution in the GoI's stake, a change in IREDA's strategic role or a sustained decline in its profitability and asset quality indicators could warrant a rating change. The rating for the GoI fully-serviced bonds factors in the GoI's obligation towards the captioned debt programme as per office memorandums (OM) dated October 4, 2016 and October 20, 2016 issued by the Budget Division, Department of Economic Affairs, Ministry of Finance, Government of India. As per these OMs, the Government has agreed to pay the principal and interest amounts due on the captioned debt programme through budgetary allocations. The rating for these bonds addresses the servicing of the debt as per the terms of the Memorandum of Understanding (MoU) between IREDA and the Ministry of New and Renewable Energy (MNRE). The one notch lower rating assigned to IREDA's perpetual debt programme compared to the [ICRA]AA+ rating for the other long-term debt programmes reflects the specific features of these instruments wherein debt servicing is additionally linked to meeting the regulatory norms on capitalisation and reported profitability. The domestic regulatory norms for hybrid debt capital instruments include regulatory approvals from the Reserve Bank of India (RBI) for debt servicing (including principal repayments) in case the company reports a loss and is not liable to service the debt if it breaches the minimum regulatory capitalisation norms.