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Fundamental View
AS OF 17 Jun 2025Rural Electrification Corp Ltd (REC) is an important public sector enterprise as it is the government’s key strategic partner for driving reforms and developments in the power sector, and providing financing to weaker players (particularly distribution companies or “discoms”) to prevent liquidity disruptions to the sector, similar to its parent Power Finance Corp’s (PFC) mandate.
We view REC’s credit profile as underpinned by strong state support due to its majority 52.63% ownership by PFC, which is in turn 55.99% owned by the government of India (GoI), as well as the key role that it plays in an essential sector of the country.
REC is rated in line with both its parent, PFC, and the Indian sovereign at the international credit rating agencies.
Business Description
AS OF 17 Jun 2025- Established in 1969, Rural Electrification Corp Ltd (REC) is an important public sector enterprise of the Government of India (GoI) due to its mandate of helping to support the country's power sector initiatives. It has been designated as a systematically important NBFC by the Reserve Bank of India (RBI).
- REC went public on the Indian stock exchanges in 2008 but continued to be majority owned by the GoI until March 2019, where the GoI sold its 52.63% shareholding in REC to Power Finance Corp (PFC) for INR 145 bn as part of the GoI's efforts to monetise its shareholding in different public sector enterprises; PFC is in turn 56% owned by the GoI. REC’s non-PFC shareholding is broadly similar to that of its parent, with a 20% share of foreign portfolio investors, 12% individuals, 9% mutual funds, and 6% others.
- REC has continued to be run as a standalone institution despite PFC's majority ownership in the entity.
- Similar to its parent, REC primarily provides funding to the public sector (~88% of its loan book) while the private sector is ~12%. By segment, Transmission & Distribution (T&D) is the largest part of the loan asset mix at 47%, followed by conventional and renewable energy generation at 28% and 10% respectively, while Infrastructure (12%) and Others (3%) round up the rest.
Risk & Catalysts
AS OF 17 Jun 2025Given its mandate, REC has concentrated loan exposure to the power sector which is also chunky in nature; power generation projects typically involve large upfront borrowing and have long gestation periods before the projects become operational. Resolutions of stressed exposures have been with delays due to India’s slow moving Insolvency & Bankruptcy Code (IBC) regime despite the ongoing NCLT reforms. REC has a conservative reserving policy; lumpy provisioning and reversals is the result.
Asset quality risk is also mitigated by a majority public sector exposure; while many state government discoms are in poor health, REC can get funds meant for the states through the GoI/RBI if payments are overdue.
Like most NBFCs, REC is reliant on the confidence sensitive wholesale market for funding. However, its quasi-government status enables it to have diversified funding sources (onshore and offshore) at costs that are close to the sovereign.
Key Metric
AS OF 17 Jun 2025| INR mn | FY21 | FY22 | FY23 | FY24 | FY25 |
|---|---|---|---|---|---|
| NIM | 3.72% | 4.07% | 3.38% | 3.57% | 3.63% |
| PPP ROAA | 3.27% | 3.91% | 3.17% | 3.24% | 3.60% |
| ROAA | 2.08% | 2.47% | 2.53% | 2.77% | 2.71% |
| ROE (Reported) | 21.3% | 21.3% | 20.4% | 22.2% | 21.5% |
| Total Equity/Total Assets | 10.78% | 12.42% | 12.41% | 12.56% | 12.65% |
| Tier 1 Ratio | 16.3% | 19.6% | 22.8% | 23.3% | 23.8% |
| Total Capital Ratio | 19.7% | 23.6% | 25.8% | 25.8% | 26.0% |
| Gross NPA Ratio | 4.84% | 4.45% | 3.42% | 2.71% | 1.35% |
| Provisions/Avg Loans | 0.64% | 0.91% | 0.03% | (0.29%) | 0.19% |
CreditSight View Comment
AS OF 17 Jun 2025REC is 52.63% owned by PFC and along with its parent is one of two policy NBFIs that provides funding for power generation and T&D projects, lending largely to state government utilities (88% of loans) vs. the private sector (12%). After a few years of improving profitability and margins, FY23 saw a reversal, with net income increasing YoY only due to a substantial decline in credit costs; FY24 was better on higher NIMs and provision releases, and FY25 has gone well. Asset quality has improved materially over the years. The CAR ratio is ~26%. Although a number of state government utilities are in poor health, the NBFIs can get funds meant for the states through the GoI/RBI if they don’t get paid in time. Spreads have widened back to fair levels so have RECLIN on Market perform.
Recommendation Reviewed: June 17, 2025
Recommendation Changed: May 22, 2025
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