RBI clears proposed merger of REC with Power Finance Corporation

NEW DELHI: The Reserve Bank of India has issued a no-objection certificate for the proposed merger of Rural Electrification Corporation (REC) Ltd into Power Finance Corporation (PFC), clearing a major regulatory hurdle for the consolidation of the two state-owned power lenders [3, 4]. The approval, granted on October 15, is subject to the conditions specified by the central bank and requires further statutory, shareholder, and creditor clearances before the transaction can be finalised.

The consolidation was first flagged in the Union Budget 2026-27, where the Finance Minister proposed restructuring public sector non-banking financial companies to enhance scale and efficiency in the energy sector [2, 5]. Following this directive, the boards of both PFC and REC granted in-principle approval for the merger on February 6, 2026. They subsequently approved the detailed merger scheme on June 28, 2026, paving the way for the regulatory filings.

The merger will create a massive financing entity for the power and infrastructure sectors. According to recent assessments, PFC’s loan book stands at approximately Rs 11.51 lakh crore, while REC’s is around Rs 5.82 lakh crore. Together, the combined entity will hold a loan portfolio of roughly Rs 17.33 lakh crore. The government holds about a 56 per cent stake in PFC, which in turn owns a majority 52.63 per cent stake in REC [2, 5].

The current push for consolidation marks a significant shift from the stance taken by REC’s management just a few years ago. In a 2023 interview, REC Chairman and Managing Director Vivek Kumar Dewangan had stated that a merger was "no longer an option," arguing that combining the entities would limit their borrowing and lending capacities compared to operating independently. During that period, REC reported a 13 per cent growth in its loan book to Rs 4.35 lakh crore, maintaining that independent operations allowed them to raise up to 20 per cent of a financier's net worth.

However, the government has since prioritised creating larger institutions to finance the country's energy transition. Financial analysts note that while the merger aims to build scale, it also concentrates risk. As highlighted by the Centre for Financial Accountability, combining two lenders that primarily finance state electricity distribution companies increases exposure to a sector that frequently faces financial stress. The International Monetary Fund has previously warned that large state-owned NBFCs with heavy infrastructure exposure can pose financial stability risks if they face stress, given their deep links to banks and capital markets.

REC and PFC must now navigate the remaining regulatory and legal requirements. The finalisation of the merger scheme will depend on the affirmative votes from the shareholders and creditors of both companies, as well as clearances from other relevant statutory authorities. The merged entity is expected to remain classified as a government company under the provisions of the Companies Act, 2013.