Cautious approach: PFC to tighten lending norms after REC deal

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Updated: March 29, 2019 6:20:03 AM

State-run electricity distribution companies have already reported financial losses of over Rs 15,000 crore in H1FY19 — as much as the losses incurred by them during the whole of FY18 — signalling a reversal of a declining trend since the launch of the UDAY scheme.

REC deal, PFC, discoms, PFC rating, NPA, HDFC, IOCLAlleviating concerns from a section of the industry, PFC officials said that the REC-takeover would not have any impact on funding inflow to the power sector.

State-run Power Finance Corporation (PFC) would become more stringent in evaluating the creditworthiness of state-owned power distribution companies (discoms) as the sector-specific lender would now have to become more cautious about maintaining its capital levels after the Rs 14,500 crore takeover of the Union government’s stake in REC.

“We would now be monitoring the payment discipline (of the state-owned entities) more strictly,” PFC chairman and MD Rajeev Sharma said on Thursday, while speaking to the media about the acquisition. Global rating agency Moody’s warned on Wednesday that PFC’s rating could be downgraded if the financial strength of the state-run power utilities deteriorates significantly.

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State-run electricity distribution companies have already reported financial losses of over Rs 15,000 crore in H1FY19 — as much as the losses incurred by them during the whole of FY18 — signalling a reversal of a declining trend since the launch of the UDAY scheme.

“A collaborative approach towards funding power sector would be followed to encourage state power utilities to improve operational and financial performance for access to funds from PFC and REC,” Sharma said. Moody’s also estimates it will take two years for PFC to help partially rebuild its capital. The state-run lender’s capital levels would be weakened as it has not raised any equity for this transaction. Though the ratings agency retained its ‘Baa3’ ratings for PFC and REC, the lowest investment-grade rating that Moody’s offers, it speculates that PFC will need two years to partially rebuild its capital.

“For maintaining capital, we have already raised around Rs 5,500 crore as subordinate debt,” Sharma added.
As on December 31, 2018, 83% of the lender’s total gross loan assets worth Rs 2.98 lakh crore was in the government sector. None of the PFC’s NPAs (gross NPA stands at 9.5%, or Rs 28,000 crore) are owned by the government entities.

Alleviating concerns from a section of the industry, PFC officials said that the REC-takeover would not have any impact on funding inflow to the power sector.

Officials also pointed out that though REC would ultimately be merged with PFC, the timeline for the same has not been decided and the same would be done after consultations with the government—which would remain the majority stakeholder of the entity post-merger.

Sharma said that based on FY18 data, the merger will make PFC the third highest profit making financial player in India after HDFC Bank and HDFC and highest profitmaking PSU in India after IOCL and ONGC.

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