Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to the government, given REC’s key role in financing India’s power sector

REC is strategically important to the central government as it plays an important role in the Indian power sector, not only by providing finance but also by implementing the government’s power sector policies. REC, along with PFC is designated as nodal agency for facilitating implementation of RDSS which is reforms-based and results-linked scheme with an outlay of Rs 3.04 lakh crore over a period of 5 years and would be available till fiscal 2026. It is also the nodal agency for channeling finance towards its electrification programme under the Deendayal Upadhyaya Gram Jyoti Yojana (formerly known as Rajiv Gandhi Grameen Vidyutikaran Yojana) and Pradhan Mantri Sahaj Bijli Har Ghar Yojana (translated as the Prime Minister’s Programme to provide easy electricity access to all households), or ‘Saubhagya’ and Late payment surcharge scheme. Furthermore, the company has been nominated as the sole nodal agency to operate the National Electricity Fund Scheme—an interest subsidy scheme introduced by the central government—to promote capital investment in the power distribution sector. The company plays a developmental role in channeling finance to meet the power sector’s large funding requirement, particularly state power utilities, which constitute 90% of its portfolio as on December 31, 2023. In fiscal 2022, GoI announced LPS to address dues of discoms to generation and transmission companies. REC has extended financial assistance (disbursed Rs 38,403 crore as of December 31, 2023) to various discoms under the rules, to clear their outstanding dues.

The government supports the company financially and operationally in various ways, including conferring special status to raise capital gains tax exemption bonds. CRISIL Ratings believes the government of India has strong strategic reasons and a moral obligation to support REC, both on an ongoing basis and in the event of distress, given the latter’s role in implementing the government’s power sector policies.

Dominant market position in the power financing segment

REC plays an important role in the Indian power sector, not only by providing finance but also by implementing the government’s power sector policies. REC provides project-based long-term loans for generation, transmission and distribution activities and renewable energy. Besides, the company also offers short-term loans for working capital requirement, bridge loans and debt refinancing. REC’s outstanding loan book had exposure of 90% and 10% to the state sector and private sector, respectively, as on December 31, 2023. The importance of REC in channelling financing to the domestic power sector is underscored by the fact that REC, together with PFC, accounted for a significant portion of the aggregate debt raised by state power utilities. Clearly, REC will remain a key financier to the state power utilities and, therefore, play a crucial role in sustaining their operations. Loans outstanding to the government sector stood at Rs 4.50 lakh crore as on December 31, 2023 (Rs 3.93 lakh crore as on March 31, 2023; Rs 3.51 lakh crore as on March 31, 2022). As on December 31, 2023, overall loan book stood at Rs 4.97 lakh crore (Rs 4.35 lakh crore as on March 31, 2023; Rs 3.85 lakh crore as on March 31, 2022)

Strong resource profile

REC’s credit risk profile is supported by its sound resource profile, with competitive borrowing costs and a diversified, albeit wholesale, resource base. As on December 31, 2023, overall borrowings stood at Rs 4.33 lakh crore with domestic bonds forming the largest share at 41%, foreign currency borrowings at 27%, funding from banks/financial institutions at 20% and capital gains/tax-free bonds at 11%. REC’s debt instruments have wide market acceptability, and the company typically borrows at low spreads over government securities. Its cost of borrowing is lower than that of most of its peers and stood at 7.3% for first nine months of fiscal 2024 (6.8% for corresponding period of previous fiscal.).

Adequate capitalisation

REC's capital profile provides a cushion against asset-side risks arising from high sectoral and customer concentration. The networth was Rs 64,787 crore as on December 31, 2023 (Rs 57,680 crore as on March 31, 2023). The overall capital adequacy ratio (CAR) and Tier 1 CAR improved to 28.2% and 25.4%, respectively, as on December 31, 2023 (25.8% and 22.8%, respectively, as on March 31, 2023). Gearing stood at 6.7 times as on December 31, 2023 (6.5 times as on March 31, 2023). The networth to net NPA ratio was 15.2 times as on December 31, 2023 (13.2 times as on March 31, 2023). Capitalisation is expected to remain adequate over the medium term, supported by a demonstrated ability to raise capital through private placement. Accretion to networth will be supported by the company's ability to maintain good interest spreads and low operating expense ratio. The return on assets (RoA) ratio was 2.68% for first nine months of fiscal 2024, against 2.53% for corresponding period of previous fiscal. The company’s ability to contain credit costs and hence improve profitability and capitalisation will remain a key monitorable.

Weakness:

Inherent vulnerability in asset quality and significant sectoral and customer concentration

REC's asset quality remains inherently vulnerable as it caters predominantly to the power sector and faces inherent asset quality challenges because of the weak financial risk profiles of its main customers, the state power utilities, Furthermore, the top 10 borrowers constitute ~41% of the total loan book. Effective execution of various reform measures is extremely critical for state power utilities to produce the desired positive impact, and broad-based political consensus is necessary to implement the much-needed tariff hikes to ensure sustained improvement in their performance. However, REC has been able to manage overall asset quality risks in this segment on account of its criticality to borrowers and through various asset protection mechanisms. Further, REC has recently forayed into logistics & infrastructure sector which is expected to diversify its loan book further.

REC also has around 10% exposure to the private sector as on December 31, 2023, which has been vulnerable to asset quality risks because of issues such as lack of fuel availability, inability to pass on fuel price increases, and absence of long-term power purchase agreements for assured power offtake. As on December 31, 2023, the overall gross NPAs and Net NPAs improved to 2.78% and 0.82%, respectively, from 3.42% and 1.01%, respectively, as on March 31, 2023, led by recovery from large private delinquent accounts. As on December 31, 2023, 29% of private sector loans have been recognized as stage III assets on which the company has a provision coverage of 70%.

Overall, CRISIL Ratings believes the asset quality will remain vulnerable over the medium term primarily because of the increased challenges likely to be faced with private sector borrowers. The ability to resolve stressed accounts will also be a key monitorable going ahead.