During your opening remarks you said that this year in a declining rate environment, repayments were elevated which is where we saw lower loan growth than what you had guided. But more importantly we also saw disbursements this year also declined YoY in FY'26. So, what has changed in the last 12 months where disbursements are weak, repayments as you explained are elevated, is it competitive intensity or is it predominantly some of the larger PSU banks which are leading to disbursements also remaining weak?
On account of disbursements, I think we are more or less at par with the previous year. Last year it was 168,000, this year it was 165,000, so it is not a major. The main issue is the nature of disbursements which have been done. Earlier the DISCOMs were more and more were taking the RBPF loan, which has a shorter tenor, 6 months average maturity and they keep on revolving that. So, that has changed this year, now they are resorting to taking medium term loans, so that has maturity ranging from 3 to 5 to 7 something like that. So, you will not see that rolling over of those facilities, so RBPF loan has majorly reduced. On the front of competition, yes, I agree competition is there, banks are looking at the commissioned assets, so are we. But I think there is sufficient scope in the market and looking at the overall funding requirement of the power sector that there is sufficient headroom to grow for all the institutions.
My question is on the sanction pool, if you can give some details about FY26 particularly segment wise. And a follow up on that is a big portion, almost half of our sanctions between last 3-4 years remain undisbursed. In that context the loan growth guidance of 10%, if you can help us understand why do we feel that a big chunk of that we may not be able to disburse in the coming year. And my second question is about the merger - there are 600-700 employees on both sides doing similar roles. What is the plan there?
The current year sanctions are around INR 2.85 lakh crore. For any infrastructure financing, sanctions to convert into disbursement always takes time. When we sanction the loan, we put certain pre-commitment conditions, certain approvals are required for the disbursements. So, when we talk of the infrastructure loans, lot many environmental conditions and other now you have the land acquisitions to be done. All such conditions are required to be fulfilled before the disbursement starts. And in the initial year of construction, the disbursements are generally at a lower pace which picks up as the project progresses and coming to the commissioning. If I talk of the current year sanction, out of INR 2.85 lakh crores I think around INR 80,000 only has been disbursed. So, everything is spilling over to the next year. On the merger and employees: PFC and REC both have lean manpower. We are just 520 and so is the number for the REC. So, we are just 1000 employees. We would try to strengthen our functions where we need more focus - monitoring, relationship management. Compliances we need to strengthen. We have a GIFT City subsidiary. REC has number of regional offices. So, the staff will be aligned there.
After the merger, government shareholding will fall to 41%-42% in a share swap scenario. How are we thinking about maintaining that 50% limit as per Companies' Act? And as a combined entity, when borrowing from capital markets or banks, we might hit the limits that creditors have. So, are we thinking about borrowings from that point of view?
On exposure, in 2019 when PFC acquired Government of India stake in REC. We both were individually borrowing exposure was 20% for the majorly for the banks. So, after that we formed a group. So, 20 plus 20-40 has reduced to 25%. And now if from the two entities the merged entity comes into picture, the borrowing limit is going to reduce from 25% to 20%. I would like to clarify that as on date if you see the overall capital of the banking sector. We have exposure only with few banks which has been utilized till now. I don't think that is going to be the challenge in this regard. Government Company status - the Government has committed that they are going to maintain the status of the merged entity as the government Company. So, modalities and how, when all these things are yet to be decided. Whenever we have more clarity definitely, we will be sharing with the investor.
You have guided for 10% AUM growth here. But seeing the power demand, can this exceed in the medium term? On dividend policy, if you look at 30% payout ratio but on standalone - when the merger is done will PFC dividend go up? And on ROE profile - things are improving on distribution side, plus on merger the cost benefit will be there, leverage can go up. What is the ROE profile that we should look at - something like 17%, 18%? Also, what is the spread between cost of borrowing on domestic versus foreign side with hedging cost?
On the guidance front there is always more and more competition. Our loan book is growing and on the growing loan book we expect that our guidance is that around 10% growth will be there. On the dividend front right now yes dividend is taken as a part of PFC's income directly adding to the profit and 30% of profit is going. So, effectively 9% is coming to the investors. And once the merged entity is there profitability of both the companies are there. Larger group of shareholders will be there. But we are going to follow the DIPAM dividend policy and whatever are the consolidated profits or the merged entity profit, dividend will be declared on that. DIPAM policy says 30% of the profit to be shared as dividend. For NBFC we generally focus on the spread. So, for the spread we have already given guidance of 2.40% to 2.50%. For borrowing by PFC we generally diversify our sources. And as of now 60% has been borrowed from the bond market, 20% from the term loan from the banks and 20% from the way of foreign currency.
On the cost of hedging reserve, that has kind of substantially moved to around 34 billion versus 1 billion in FY25. Given hedging cost was quite substantial this year and assuming another depreciation of 4%-5% in FY27, are we accordingly well positioned or we could see some similar sizable hedging cost in FY27 as well? Also, if you could give some impact - Rs. 1 or Rs. 2 movement in the INR how much that could impact your P&L? And secondly, how much time would it take for the remaining sanctions - is it possible that once the projects already sanctioned are commissioned it could be refinanced?
There is always a risk of competition which is there. Banks are more willing to take or do refinancing on the renewable portfolio. Reason being the gestation is low, it turns out commissioning happens early, cash flows are certain and specifically these are the low-ticket size loans. So, you will see most of the refinancing happening in the renewable space. On the hedging cost, there are various instruments of hedging. We have hedged 97% of our portfolio. But yes, because the risk has been covered in the specified range. Whenever there is an abnormal movement in the exchange rate, it is always happening this way. However, the actual loss is depending on the date of the maturity of the liability. If I say that whatever we are booking it is a notional loss in most of the cases, except where it is on the maturities which are falling within the financial year. So, actual loss or gain will be known only at that time.
You have mentioned one thing that the transmission and distribution losses have been now contained to 15.04%. Going forward, can we look to a distribution and transmission loss getting halved from this 15%?
See, I agree as a part of RDSS Scheme there were two portions. One is improvement in the distribution infrastructure and the other was the installation of the prepaid meters. Prepaid meters have come up only in few states. Others have ordered but the installation is yet to be done. The DISCOM losses were majorly coming from, apart from the collection and the billing efficiency, were coming from the legacy subsidy dues and the legacy dues where the government departments were using the power. So, they were huge and as a part of RDSS scheme, the nodal agencies and the criteria for RDSS scheme puts a condition that subsidy has to be received in advance by all the DISCOMS. More and more solarization. There is a KUSUM scheme which is solarizing the pump sets in the agriculture area. These are the collective reasons for improvement in the AT&C process.
On credit cost of provisioning - the last few years, we have seen benefit of our NPAs resolving and that's why the provisioning has been negligible. However, incrementally, wherein large number of NPA accounts are broadly resolved, how do you see the credit cost moving? Especially on standard accounts provisioning. And second question was on the disbursement front, what is our target for FY27 in terms of the disbursements?
Standard account provisioning, we have an ECL policy where we say on an average, we provide for 0.4%. On under construction, we have 1% and 0.4, that is the minimum, subject to ECL. We work out the expected credit loss also. So, I agree that we do have resolved all the NPAs and brought it to the lowest level. So, going forward, we will not have the benefit of, like you were saying, that this year we have INR 800 crore benefit from the resolution of the non-performing asset. But definitely that the spread which we are working and managing of our borrowing cost is going to help us. On disbursements for FY27: it's very difficult to say about the disbursement figure because it all depends on the nature of the loan being disbursed. This year we have, as compared to the earlier years, the scheduled repayments are comparatively lower.
What is the total unsanctioned book? Not for FY26 but total, whatever the spillover from FY24-25. And out of which how much are you looking to get converted, let's say next 3-4 years? And the second one would be the new ECL norms which would come from next April - what would be its effect on our books and the way we are accounting stuff?
On ECL norms, RBI norms are, since we are under IndAS, so they are not applicable to us directly for the purpose of profitability. But definitely RBI says that IRAC norms are to be followed for creating, that IRAC provision is required to be maintained. But however if we see our current policies, broadly they are overall basis, as of now they are in sync with RBI. But we have been calculating ECL project wise separately. And our ECL provisioning is going to be governed by that policy. I don't see much of the difference. And I think it's very difficult for us to give the sanctioned but not disbursed amount. But broadly if I say it may be around 2.5 to 3 lakh crores will be the figure.
There was certain media articles which talked about some virtual PPA and then in the middle of the year there was an Electricity Draft Bill by the Government which said CERC will be appointed to find a solution to the PPAs. Now that we are no longer financing long-term projects, there are shorter-term projects as well. If you can help us understand what is happening from the regulatory government front on making PPAs more flexible because that obviously helps you in disbursing your sanctioned loans faster.
On the PPA front there has not been any major change. Virtual PPA is for the solar project where they want to have the renewable energy certificates and all those things. I think few of the multinational agencies have entered into such type of virtual PPAs. But on an average, there is the practice is which is earlier also, the PPAs are being signed by the respective states and the states somehow are in a realignment mode. Earlier it was purely solar and wind projects. Now we are talking of the hybrid projects. Now we are talking of the compulsory storage. So, all these changes in the regulation. So, states are also trying to align those requirements and that is how it is taking some time. But I don't think that from the policy perspective there has been any change on these PPAs. We have exposure on some merchant powers also depending on the strength of the promoter. Not all but yes on case-to-case basis we are concerned.
In terms of your target market, are you looking at expanding that in terms of other sectors? For example, nuclear is supposed to be promising over the next 5-10 years. And also, within the whole solar value chain, there is a lot of attempts by players for backward integration, forward integration, etc. So just trying to look at your target market, how do you look at that over the next 5 years? And my second question was the impact of the geopolitics over the last 3 months. There might be a lag effect over the next many quarters. So, in terms of your loan portfolio, have you done some analysis of stress which might come up because of the delayed impact of the geopolitical situation on the companies that you lend to?
On the target market, our mandate allows us to fund for the power sector, backward and forward linkages, energy efficiency, energy transition and also the infrastructure. When we talk of the nuclear, solar value chain, all these are nuclear I think for the financing, any proposal is yet to come. Solar value chain, we are already into the manufacturing of the solar and wind equipment where we are focusing on the Honorable Prime Minister focus for the Atmanirbhar Bharat. We are funding for the battery, battery equipment as well as the battery storage projects, pump storage projects. On the geopolitical situation, I would say it's positive for the power sector. Because power sector is going to help take out of the crisis situation for India as a whole. On the borrowing, yes, something negative is there because of the volatility of the exchange rate. Otherwise, if some of the promoters have lined up some equipments or some supplies from other countries, that could be adversely impacted but that's not going to have huge impact.
How are you seeing loan asset mix changing in medium term? It will be very helpful if you can please give the figures as well.
On the medium term, our focus area was the conventional generation at that point of time. And the conventional generation you see was majorly focused in the thermal area. We are seeing our mix changing from the fossil fuel to the non-fossil fuel category and next is to the distribution sector. There was at one point of time PFC's overall lending may be around 75% was towards the conventional generation. Now we have moved from there to around 50% to the generation of which 16% is the renewable and the balance is the conventional generation. And major next is the distribution sector. So, there has been a shift and going forward also if we see the installed capacity which is coming up in future, we can easily say that it's going to be around 70-30 mix of the conventional or we say thermal projects vis-a-vis renewable.
Last year RBI reduced interest by 100 basis points. So, due to that I think our profit has increased. So, currently geopolitical situation and war and everything, next year if the RBI increases again interest rate by 100 basis points and our all the loans has been restructured to lower rates, so what will be the situation?
For PFC, 65% borrowing is at fixed rate and that too at a longer tenor. If we say 60% borrowing is from bonds, so the reduction in the interest rate doesn't help us. Because there we don't have the flexibility to reset our rate. On an average the liability period is around 5 to 6 years. So, our liability, which has been as on date, which is at a higher rate, it will take 5 years to retire. For PFC it is always the impact of whether you talk of increasing interest rate scenario or decreasing interest rate scenario, it's not sudden like banks, it is always a gradual movement. So, the decreasing interest rate scenario that is why we were saying that we have a huge prepayments because our interest liability figures are not that flexible in line with the market. Being 65% at fixed rate that gives us stability also. That even when the increasing interest rate scenario is there, so the gradual transformation of the rates is going to happen.