India's Power Finance Corporation continues to fund non-performing coal assets

In March 2019, India’s government-owned Power Finance Corporation (PFC) acquired 52.3% the Rural Electrification Corporation Ltd. (REC) to form the country’s largest non-banking finance company (NBFC), and a critically important lender for India’s power sector with a total asset book approaching US$100bn as of December 2019.

In this report we appraise the impact of PFC and REC’s continued lending to coal-fired projects on the India’s power sector, given the ongoing stress in India’s NBFC sector post the Infrastructure Leasing & Financial Services Ltd. default.

Over the years PFC and REC have lent extensively to coal-fired power projects, with Rs343,746 crore (US$49bn), or 54% of their total loan book exposed to the thermal power sector.

PFC and REC have 54% of their total loan book exposed to the thermal power sector.

This lending has in turn accumulated an extensive list of non-performing assets (NPAs) on their balance sheets, amounting to roughly Rs47,454 crore (US$6.8bn) as of December 2019 However, IEEFA views the extent of PFC’s stranded asset risk significantly higher than that as India’s thermal power generation sector continues to generate ongoing oversized trouble for the country’s banks, accounting for US$40-60bn in stranded assets.

PFC (including its subsidiary REC) account for impairment losses of Rs15,751 crore (US$2 billion) between FY2014/15 and FY2019/20 (April – December). In IEEFA’s view, PFC is extremely underprovided by accounting insufficiently for impairment risks and associated costs, given its almost zero provision for its Distribution Company (discom) sector exposure.

In calendar year 2019, 8.8GW of new coal-fired power projects started construction. As PFC is the lender of last resort for new coal power, all these projects received lending support from PFC and REC, underlining a key development in India — lending from the private sector for coal-fired project proposals has diminished to negligible levels. In this report, we detail PFC and REC’s lending to new projects and refinancing of loans to other unbankable projects and the stranded asset risk associated with these projects.

On the positive side, PFC and REC have lent a combined Rs33,759 crore (US$4.8bn) to renewable energy projects as of December 2019, with some 5% of loans outstanding.

Given India’s massive renewables target of 450GW by 2029/30, and the associated funding requirements for the expansion and modernisation of the national grid system, IEEFA estimates US$500-700bn of new investment is needed. This will also require work from smaller regional developers that provides a significant opportunity for a rapid step-up in funding from PFC and REC.

Going forward PFC and REC must pivot to prioritise lending to India’s renewable energy generation and grid sectors, to act as a catalyst for further private debt and equity investments in this critical low-cost, low-emissions domestic opportunity.

In the report, we use PFC to address the consolidated entity, as REC is partly owned by PFC. assets.

Press release: Is India’s PFC financing a herd of white elephants?