The rating agency has also affirmed the negative outlook, in line with its similar outlook on the Indian sovereign. After Fitch had downgraded its outlook on India's sovereign rating to negative from stable in June 2020, REC’s outlook was also subsequently revised to negative.
Fitch Ratings on Wednesday said that it has maintained REC’s (formerly Rural Electrification Corporation) investment-grade rating of ‘BBB-‘ as it believes the central government — which indirectly holds REC’s 52.63% stake via PFC — has a strong incentive to provide extraordinary support to the power sector lender.
The rating agency has also affirmed the negative outlook, in line with its similar outlook on the Indian sovereign. After Fitch had downgraded its outlook on India’s sovereign rating to negative from stable in June 2020, REC’s outlook was also subsequently revised to negative.
Obligations rated BBB by Fitch’s are judged to be investment-grade indicating relatively low to moderate credit risk. The capacity for payment of financial commitments for BBB-rated entities is considered adequate, but adverse business or economic conditions are more likely to impair this capacity. On the back of the government’s infrastructure investment plan, Fitch expects REC to maintain stable growth over the medium term.
REC’s profit increased by 41% year-on-year to `6,292 crore in April-December, 2020, due to continued loan growth and net interest margin expansion. The state-run firm’s net non-performing assets ratio declined to 1.95% by the end of Q3, FY21, from 3.32% at FY20-end and the management claims that the majority of REC’s loan assets are regularly serviced. REC’s loan book reached `3.57 lakh crore at 2020-end, up 16% annually.
The company’s cost of borrowing is aligned with that of the national government, which leads Fitch to believe the market participants consider REC as the state’s proxy funding vehicle for the sector, and that a default could damage the state’s credibility in supporting strategically important government entities and their refinancing capacity.
The rating agency said that REC also benefited from the issuance of capital gains and tax-free bonds that accounted for 11% of its borrowing. “REC is financially self-sufficient and has not required financial support from the state, which constrains the assessment of the company’s government support record,” Fitch added.
REC can be downgraded if PFC’s shareholding in REC is diluted to below a majority stake, while a revision of the outlook on India to ‘stable’ would result in a similar upgrade for REC.