Breaching the limit? REC buyout to stretch PFC balancesheet, says report

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Published: December 12, 2018 4:40:14 AM

Between FY14 and FY18, the loan books of PFC and REC expanded at a compound annual growth rate (CAGR) of 10.22% to Rs 2.79 lakh crore and 12.66% to Rs 2.39 lakh crore, respectively

In the first half of financial year 2018-19 (H1FY1)9, the cash and cash equivalents in the balance sheets of PFC and REC were Rs 1,799 crore and Rs 22 crore, respectively. (Representational photo)

The acquisition of government’s 52.63% stake in Rural Electrification Corporation (REC) by Power Finance Corporation (PFC) will increase the leverage of the latter with an impact on return on assets and return on equity; however, positive liquidity buckets of PFC over October 2018-March 2019 will address liquidity concerns, according to an India Ratings report.

In the first half of financial year 2018-19 (H1FY1)9, the cash and cash equivalents in the balance sheets of PFC and REC were Rs 1,799 crore and Rs 22 crore, respectively. While the contours of the acquisition are being finalised by a group of ministers and secretaries, the leverage of PFC is likely to go up by Rs 14,000 crore to Rs 15,000 crore to buy out the government’s stake in REC.

The acquired entity might breach the group or single borrowing limit with banks and might require diversification with regard to lenders and investors, said the report.

Between FY14 and FY18, the loan books of PFC and REC expanded at a compound annual growth rate (CAGR) of 10.22% to Rs 2.79 lakh crore and 12.66% to Rs 2.39 lakh crore, respectively.

Loan books of both the entities as of H1FY19 were dominated by power generation companies, though REC has a wider presence in the distribution segment than PFC, stated the report. The acquisition is aimed at achieving integration of the power financing businesses of REC and PFC while the disinvestment proceeds will boost government’s finances and help to reduce the fiscal slippage in FY19, according to the report.

REC’s gross delinquent assets stood 175 basis points lower than those of PFC in H1FY19. For REC and PFC, delinquent assets arise only from private sector exposure. A lower exposure to private sector lending has helped REC in maintaining better asset quality.

Private sector lending accounted for 13% and 18% of the loan books of REC and PFC in H1FY19, respectively, said
the report.

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