PFC's ratings reflect risks in its asset profile, the company's increasing exposure to foreign currency and interest rate risks, and its aggressive asset growth targets that are expected to outpace the growth of its capital. Strengths that offset these risks include its sound profitability, strong capitalisation, and important role in India's power sector. Support from the government of India enhances PFC's creditworthiness. PFC's foreign currency rating reflects the credit risks associated with the sovereign foreign currency rating on the Republic of India.

PFC is a government of India-owned Financial institutionthat lends to power sector concerns in India, mainly state electricity boards (SEBs). The company's asset quality is vulnerable to the poor creditworthiness of its SEB clients and their owner state governments.

PFC has attempted to mitigate this risk by well securing its assets through state government guarantees and escrow account arrangements, which give the company preferential first charge on SEB revenues. However, Standard & Poor's believes that over the long term, PFC's asset quality can be sustained only if the Financial health of the SEBs improves. The company's lending to private-sector power projects diversifies its borrower profile, but exposes it to a higher-risk asset class.

PFC's access to low-cost and long-tenor borrowings fromdomestic markets has lessened, while its exposure to foreign exchange and interest rate risks have increased, though its hedging strategies offset currency risk to some extent. However, its ambitious growth target of over 30% annually could reduce its currently high Financial flexibility, if internal capital growth does not meet expectations.

PFC's profits have doubled over the last two years, partlydue to its successful restructuring of some nonperforming loans to yield cash. The company's return on assets of 5.9% in fiscal 1999 is above-average. PFC's capitalisation is superior by international comparison, with common equity averaging more than 30% of total assets, which is expected to provide the company with an adequate cushion for its growth plans.

Government commitment to power sector restructuring isreflected in the recent changes in the regulatory framework and ongoing SEB reforms. In addition, the government views PFC as a tool in furthering its policy objective of power sector development and reform. Through the central government's Ministry of Power, PFC is involved in the central and state governments' development planning mechanism.