Power Finance Corporation gets LAAA

ICRA has assigned LAAA rating to the Rs. 2,100 crore term borrowing programme of Power Finance Corporation (PFC). The rating indicates highest safety and reflects PFC's sovereign ownership and its strategically important role in financing the power sector. The rating also takes into account PFC's stable profitability, strong capital adequacy and its demonstrated ability to improve its collection efficiency despite the fundamentally weak credit quality of most of its borrowers. ICRA has also reaffirmed the LAAA ratings assigned to long term borrowing programmes in earlier years, MAAA rating for the fixed deposit programme and A1+ rating for the short-term borrowing programme, all indicating highest safety.

The corporation is a specialised development financial institution set up with the objective of funding projects in the domestic power sector. PFC finances State sector utilities such as State electricity boards (SEBs) and State generating companies (SGCs). It provides finance through loans, lease and bill discounting. It also extends guarantees on behalf of these entities. Since it commenced operations in 1988, it has funded the utilities in setting up thermal/ hydel power plants, in renovation and modernisation schemes, system improvements, energy conservation schemes and repair and maintenance of capital equipment. With the opening up of the power sector, PFC has also started funding independent power producers (IPPs).

As on March 31, 2001, PFC had an outstanding loan portfolio of nearly Rs. 12,930 crores. While the credit quality of most of PFC's borrowers is weak, PFC has demonstrated its ability to improve its collection efficiency over the years. It has also been able to renegotiate its outstandings from defaulting SEBs and has been able to recover substantial amount of its dues in a timely manner.

Besides State government guarantee, it insists on escrow covers for fresh disbursements. For the weaker SEBs, it has started insisting on creating escrow covers on the existing loans as well and fresh disbursements to these SEBs have been restricted. In future, PFC's lending rates could come under pressure as the better performing SEBs could raise funds directly or from other banks and financial institutions. However, the Government provides 4 per cent interest subsidy on power projects governed under the accelerated generation and supply programme (AG&SP) and this subsidy is routed only through PFC. ICRA expects that PFC would be able to maintain its competitive position and retain the better performing SEBs as its clientele.

In line with growth in disbursements, PFC's asset base has grown at a CAGR of 18 per cent during 1998-2001. The growth has been mainly funded through market borrowings in the form of taxable/ tax-free bonds, foreign currency loans and Government loans. PFC has been successful in raising funds at competitive rates both in the domestic and international markets, which is comparable to the similar rated financial institutions in the country. The operating expenses of PFC are low at 0.23 per cent of average assets deployed and compare favourably to other similar rated financial institutions. This has enabled it to maintain a healthy interest spread, despite extending financial assistance to SEBs at very competitive rates. PFC has taken adequate steps to mitigate the exchange risks arising out of foreign currency borrowings by creating an Exchange Risk Administration Fund. PFC's gearing remains moderate at 2.45 times as on March 31, 2001.

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Section  : Business
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