Power Finance Corporation (PFC) and REC Limited (REC) have provided a brief update on their proposed restructuring, which aims to merge the two entities. This consolidation, initially announced in the Union Budget, seeks to create a larger, focused institution to enhance scale and efficiency in financing the power sector. Both entities currently comply with RBI lending norms, and the merger is expected to maintain strong capital levels for future growth, leveraging consolidated metrics to become the largest power sector financer in India.
Background to the Proposed Merger
The proposal to restructure Power Finance Corporation Limited (PFC) and REC Limited (REC) was initially announced during the Union Budget on 1st February 2026. The core objective is to achieve greater scale and improve efficiency among Public Sector NBFCs. Following this, the Boards of both PFC and REC accorded in-principle approval for the merger on 6th February 2026, ensuring the merged entity retains its status as a “Government Company” under applicable laws.
This renewed focus on consolidation reflects a strategic intent to create a single institution capable of addressing the evolving financing needs of the power sector. It is important to note that PFC currently holds a 52.63% equity stake in REC, which it acquired in 2019.
Synergies and Market Positioning
As India pursues its goals for Viksit Bharat 2047, the power sector will require substantial capital investment. The merged entity is anticipated to benefit from improved balance sheet strength, capital efficiencies, and operational synergies, allowing for large-scale funding across the value chain. Furthermore, the combined entity will possess deeper sector expertise to capitalize on emerging technologies such as Green Hydrogen, CCUS, and small modular nuclear reactors. Based on consolidated metrics, the merged entity is expected to be positioned as the largest power sector financer in India.
Key Aspects of Implementation
Government Entity Status
The merged entity will continue to function as a Government company, and the Government of India will retain control, including the right for appointment/removal of its board members.
Merger Implementation
The precise merger structure remains under deliberation. External agencies, including consultants and valuation experts, will be appointed to ensure a structured, timely, and compliant execution, subject to necessary regulatory approvals.
Lending Business Norms
Both entities currently comply with the RBI’s credit concentration norms linked to Tier I capital. Post-merger, these limits will apply to the consolidated Tier I capital. Given the strong net worth of both companies, a breach concerning borrower exposure is not foreseen, and the entity is expected to maintain comfortable capital levels to support future lending growth.
Borrowing Exposure Framework
Currently, the outstanding borrowing mix is approximately 18% domestic bank/FI borrowings, 25% foreign currency borrowings, and 57% domestic bond borrowings. Following the 2019 stake divestment, the combined exposure under the RBI’s Large Exposure Framework (LEF) was capped at the group limit of 25% of respective banks’ Tier I capital. After the merger, a single-entity exposure limit of 20% will apply to the merged entity.
Capital Headroom Analysis
The aggregate Tier I capital of the top ten Indian banks as of 31st March, 2025, was approximately ₹18 lakh crore, with further increases expected through profit accretion. Considering this, combined with the current borrowings, the entities believe adequate headroom will be available for additional borrowings. The management expects to manage this transition smoothly without material constraints due to the multiple funding avenues available.
Source: BSE
