India’s biggest power sector lenders are set to combine after Power Finance Corporation’s board on Friday approved an in-principle merger with REC Limited, giving effect to the Union Budget 2026 plan to restructure public sector NBFCs.
In a regulatory filing, PFC said its board took note of the government’s proposal to restructure the two state-run non-banking financial companies (NBFCs) to achieve scale, improve efficiency and support higher credit disbursement across the power sector.
The merger approval follows the completion of PFC’s acquisition of the government’s controlling stake in REC earlier this month, formally bringing the rural electrification lender under PFC’s fold.
“Pursuant to ‘in principle’ approval of the Cabinet Committee on Economic Affairs, PFC acquired 52.63% of the government’s holding in REC Limited. Accordingly, PFC and REC are operating as holding and subsidiary companies,” the company said in its stock exchange filing.
The board further said it had accorded its in-principle approval for restructuring in the form of a merger of PFC and REC, while ensuring that the merged entity continues to remain a “Government Company” under the Companies Act, 2013 and other applicable laws.
“Merged entity can either be REC, PFC or a third name. All three interpretations are possible from the wording,’ said a senior official aware of the development.
The decision is rooted in the Centre’s broader strategy to consolidate public sector financial institutions to build stronger balance sheets and improve capital efficiency in infrastructure financing.
During her Union Budget speech, finance minister Nirmala Sitharaman said, “The vision for NBFCs for Viksit Bharat has been outlined with clear targets for credit disbursement and technology adoption. In order to achieve scale and improve efficiency in the Public Sector NBFCs, as a first step, it is proposed to restructure the Power Finance Corporation and Rural Electrification Corporation.”
Overlapping roles, consolidation logic
PFC and REC together form the backbone of institutional lending to India’s power sector, financing projects across thermal and renewable generation, transmission networks, grid modernisation and distribution reforms.
While PFC has historically focused on large generation and transmission assets, REC — originally set up to fund rural electrification — has expanded significantly into mainstream power sector financing over the past decade. This has resulted in substantial overlap in their lending portfolios, prompting the government to consider consolidation as a way to streamline operations and reduce duplication.
Officials have previously indicated that maintaining two large public sector lenders with similar mandates weakens capital allocation efficiency and complicates risk oversight.
Infrastructure finance implications
The proposed merger is expected to create a larger, more integrated infrastructure-focused NBFC capable of supporting India’s rapidly expanding energy investment pipeline, particularly in renewable capacity addition, grid expansion, energy storage and distribution modernisation.
Policy planners have linked the consolidation to the country’s long-term clean energy transition, which will require significant volumes of long-tenor financing to support capital-intensive projects.
Larger balance sheets are also expected to improve the merged entity’s borrowing capacity from domestic and global markets, enabling it to fund bigger projects and participate in complex infrastructure financing structures.
Process ahead
While board-level approval has been granted in principle, PFC said a detailed merger scheme would be finalised after receiving requisite regulatory and statutory clearances.
This will include approvals from sector regulators, shareholders and creditors, along with compliance under listing and corporate governance norms.
Once completed, the integration of PFC and REC would represent one of the most significant restructurings in India’s infrastructure finance space in recent years, reshaping how long-term capital is channelled into the country’s power sector and clean energy ambitions.