Global rating agency Standard and Poor's (S&P) has downgraded the outlook on Power Finance Corporation (PFC) from "stable" to "negative".
The negative outlook reflects the view that PFC's risk-adjusted capital is the lower end of the threshold for a strong assessment, S&P said in a statement.
S&P affirmed the 'BBB-' long-term issue rating on PFC's outstanding debt. The rating agency did not factor in a potential merger of PFC with another Indian government-owned finance company, REC Ltd.
The assessment could be revised if the company grows loans faster and retains less capital than rating agency expects. S&P expects PFC's risk-adjusted capital (RAC) ratio to be 9.5%-10.0% over the period next 12-18 months.
"Our lower RAC ratio limit for a bank's capital and earnings to be assessed as strong is 9.5%. PFC's RAC ratio was 10.1% as at March 31, 2018", S&P said.
The company's regulatory Tier 1 ratio of 14.9% as of Sept. 30, 2018, is better than peers'.
A lower capital and earnings assessment would weaken assessment of PFC's stand-alone credit profile (SACP) to 'bb' from 'bb+', which would lead to a downgrade to 'BB+', other factors remaining unchanged.
Substantial uncertainty remains around the timing of resolution of stressed assets, reversal of provisions for such assets, and the government's request for dividends.
The company has an extremely high likelihood of timely and sufficient extraordinary support in the event of financial distress. High business risks from PFC's concentration in the electricity sector and the weak credit quality of borrowers constrain its SACP.