Moody's affirms PFC's & REC's Baa3 ratings, sees asset quality improving

Agency expects the two state-owned companies to continue receiving strong government support

Rating agency Moody’s has affirmed "Baa3" local and foreign currency issuer ratings for Power Finance Corporation Ltd (PFC) and REC Ltd (REC), expecting a further decline in the problem loans ratio as the state-owned firms resolve legacy assets. "Baa3" is an investment grade rating with moderate credit risk.

Moody’s maintained a stable outlook on the ratings, reflecting its expectation that the companies' credit fundamentals will remain stable and they will continue receiving strong support from the government.

The standalone assessment of the companies reflects improving asset quality and profitability as they resolve legacy problem loans identified between 2016 and 2018.

PFC's gross non-performing assets (NPAs) declined from 9.4 per cent in March 2019 to 3.9 per cent in March 2023, while REC’s gross NPA decreased from 7.2 per cent in March 2019 to 3.4 per cent. Both companies have established adequate provisioning coverage for the stage 3 loans, also known as GNPAs, which stood at 97 per cent for PFC and 96 per cent for REC as of 31 March 2023.

The companies' asset quality is expected to remain stable due to their increasing loan exposure to state power distribution companies (discoms). The government's Liquidity Infusion Scheme, Late Payment Surcharge Rule, and Revamped Distribution Sector Scheme for discoms are enhancing their cash flows and reducing their leverage. Additionally, state government guarantees and subsidies to DISCOMs will mitigate credit risks for PFC and REC.

Moody's evaluation of government support for the two entities stems from their strategic significance to the country's power sector. PFC and REC serve as nodal agencies for executing vital government initiatives for the sector and are under the purview of the Ministry of Power, with government nominee directors on their boards.