Not The Brightest Bulb On The Porch: Acquisition Of REC Could Stretch PFC’s Balance Sheet, Says Report

According to a report released by India Ratings, a credit rating firm, the acquisition of REC (Rural Electrification Corporation) by PFC (Power Finance Corporation), could increase the leverage of PFC and have an adverse impact on PFC’s return on assets and return on equity.

The Cabinet Committee on Economic Affairs, headed by PM Modi, gave its in-principle approval for the sale of government’s existing 52.63 per cent stake in REC to PFC. Both the entities are state-run PSUs (Public Sector Units) operating under the Union Ministry of Power. While PFC is the financial backbone of India’s power sector, REC is a significant player in the rural electrification space.

Private sector lending accounted for 13 per cent, and 18 per cent of the loan books of REC and PFC respectively and the combined entity will have a higher exposure to the private sector. This might lead to a fall in its asset quality and affect the credit rating of the expanded PFC portfolio.

However, the government release on the merger noted, “the acquisition intends to achieve integration across the Power Chain, obtain better synergies, create economies of scale and have enhanced capability to support energy access and energy efficiency by improved capability to finance power sector.”

Also Read: Asking PFC To Buy REC Is A Bad Idea; It’s Like Eating Your Investment Seedcorn