New Delhi, February 11 The proposed merger of state-owned lenders Power Finance Corporation (PFC) and REC Ltd is expected to improve access to financing for India's renewable energy developers, particularly for large and complex projects, CreditSights said on Wednesday.
PFC and REC, both public sector non-banking financial companies (NBFCs) focused on financing the power sector, have loan portfolios broadly split across renewables (15-25 per cent), transmission and distribution (40-45 per cent), and conventional power generation (25-30 per cent).
"We believe that financing should be more readily available for the renewable companies' large, complex projects, which were more challenging to fund individually in the past, given the single counterparty lending limits prescribed by the RBI (30 per cent of Tier 1 capital for PFC and REC)," said CreditSights, a Fitch Solutions Company.
The merger would enable larger underwriting capacity and facilitate refinancing of substantial debt, including overseas dollar bonds, at competitive rates for renewable energy companies.
The combined entity is likely to have a stronger capital base, potentially easing funding constraints for large-scale renewable projects that were previously more difficult to finance individually due to Reserve Bank of India (RBI) norms on single borrower exposure. Currently, single counterparty lending is capped at 30 per cent of Tier-1 capital for both PFC and REC.
"The merger could also improve financing availability for larger transmission grid capital expenditure programs, leading to improved grid connectivity for renewable projects, which is a major challenge for renewable companies," it said.
However, the merger may marginally reduce competition in the NBFC space focused on the power sector, potentially leading to some upward pressure on funding costs.
"While the merger could result in an increase in funding costs as competition will be reduced in the NBFC space, we expect the impact on the renewable players to be manageable, as both NBFCs are bound by their state mandates to lend to the power sector at competitive costs," CreditSights added.
