Fitch Ratings has affirmed
The Outlook is Stable, in line with that on the
The affirmation reflects Fitch's view that REC remains as an important government-related entity (GRE) due to its strategic role in supporting
KEY RATING DRIVERS
Support Score Assessment 'Virtually certain'
We believe extraordinary support from the government would be 'Virtually Certain' should REC need it, reflecting a support score of 50 out of a maximum 60 under Fitch's GRE criteria. This is based on our assessment of the government's responsibility and incentive to provide support.
Responsibility to Support
Decision Making and Oversight 'Strong'
We believe the government has strong decision-making influence over REC, despite its indirect shareholding through
However, our assessment is moderated by REC's status as a Maharatna company, which grants REC with greater operational and financial autonomy compared with other public sector enterprises.
Precedents of Support 'Strong'
REC is financially self-sufficient and we consider government support to be indirect via supportive policies; government-sector borrowers accounted for 90% of REC's standalone loan assets as of the financial year ending
REC is also allowed to issue long-tenor low interest-rate bonds for extra liquidity. We view this as way to ease the company's debt financing by the government. These include infrastructure, tax-free and capital gains tax exemption bonds and accounted for 13% of REC's standalone borrowings at FY23. The government has also directly provided a term loan to REC of INR100 billion.
Incentives to Support
Preservation of Government Policy Role 'Very Strong'
We believe REC is strategically important in implementing power-sector reform to boost
REC's default is likely to disrupt funding and thus impact the power sector. There are also few substitutes, considering the company's significant market share in the power-lending sector. The market also considers REC as one of the highest-profile GREs in
Contagion Risk 'Very Strong'
We consider REC to be a reference issuer and singled out as a core government entity as a Maharatna company. REC has diverse funding channels, including access to cheap bond and offshore funding; it cost of funds is close to that of the government. REC has high visibility of borrowings, as one of
Operating Performance
REC's operating performance continues to improve. Its standalone loan asset size reached INR4.4 trillion in FY23, to be up by 13% yoy, 90% of which was loaned to government-sector borrowers. However, standalone net interest income fell by 7.21% to INR146.2 billion on higher finance costs. This saw the net interest margin on earning assets fall to 3.38%, from 4.01% in FY22. The interest spread on earning assets, measured by yield on earning assets less cost of funds, decreased to 2.45%, from 3.23%, although profit after tax still rose by 10.0% to INR110.5 billion.
Asset quality is improving as REC resolves stressed assets, with its net non-performing assets ratio falling to 1.01% in FY23 (FY22: 1.45%). The capital/risk-weighted assets ratio remained resilient at 25.8%, with a 22.8% Tier-1 ratio, up from 23.6% with 19.6% Tier-1 in FY22.
Derivation Summary
We rate REC under our Government-Related Entities Rating Criteria. The rating reflects our assessment of the government's responsibility and incentive to provide support. We believe the government is 'Virtually Certain' to step in and provide support should REC default.
Debt Ratings
REC has a
Issuer Profile
REC was established in 1969 as a non-deposit taking non-banking financial company registered with the
Liquidity and Debt Structure
REC's standalone total debt increased by 14% in FY23 to INR3.8 trillion, with the net debt/equity ratio reaching 6.5x, from 6.4x in FY22. We believe REC has adequate asset and liability management to meet the RBI's guidelines. REC has diverse funding sources, including domestic bonds (41% of total debt), foreign-currency borrowings (20%), term loans from banks and financial institutions (16%), capital gain bonds (10%), infrastructure and tax-free bonds (3%), subordinated bonds (2%) and a term loan from the government (3%).
Its overall cost of funds stood at 7.28% in FY23 and has remained consistent throughout the years. Floating interest-rate borrowings accounted for 30% of total borrowings, with 14% hedged. Undrawn bank facilities totaled INR147.6 billion at FY23, which offers liquidity when needed.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Negative rating action on
A deterioration in Fitch's perception of the government's responsibility or incentive to provide support.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Positive rating action on
ESG Considerations
Fitch does not assign ESG scores for REC, as the ratings and ESG profile are derived from the parent. ESG relevance scores and commentary for the parent entity,
Public Ratings with Credit Linkage to other ratings
REC's rating is linked to
References for Substantially Material Source Cited as Key Driver Rating
The principal sources of information used in the analysis are described in the Applicable Criteria.
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