Merged PFC-REC may face mounting borrowing costs

The long-awaited merger of REC Ltd with its parent, Power Finance Corp. (PFC), won board approval late Sunday, creating a stronger balance sheet and a larger lending institution. But the merged entity may face higher borrowing costs in the near term, as investor exposure limits would narrow its bond investor base, market experts said, calling for a diversified funding basket.

- Anshika Kayastha & Subhana Shaikh

The merger combines two of India’s top bond issuers, accounting for over half of India’s corporate bond market in fiscal year 2026. Their merger will leave mutual funds, insurers and other domestic institutional investors with less room to buy fresh bonds under single-issuer exposure limits.

“Overall borrowing requirements are unlikely to change because the underlying funding needs remain intact. The merged entity will still have to raise money from the market,” said Ajay Manglunia, executive director at Capri Global Capital.

“The main impact is on investor appetite. Earlier, investors could buy bonds issued by two separate entities. After the merger, exposure gets concentrated in a single issuer, so the appetite could reduce,” he said, adding that the entity may need to diversify its funding mix and could see yields “harden slightly” until then.

As of 31 March, domestic bonds made up 56% of PFC’s total outstanding borrowing of ₹4.9 trillion. Foreign currency debt comprised 20% of borrowings followed by real time liquidity (RTLs) from banks and financial institutions, as per data from PFC’s investor presentation for FY26.

In FY26, PFC and REC had domestic bond borrowings of ₹2.75 trillion and ₹2.77 trillion, respectively. PFC's borrowings were equivalent to 25.4% of India's corporate bond market in FY26, while REC's represented 25.6%, according to data from Primedatabase.