In the Union Budget 2026 to 27, Finance Minister Nirmala Sitharaman announced that major public sector NBFCs would be consolidated to create larger institutions to finance energy and infrastructure. Following this, the boards of Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) Limited have given in principle approval for a merger, with REC set to be merged into PFC.
The scale of this move is quite high. PFCās loan book is about Rs. 11.51 lakh crore. RECās is about Rs. 5.82 crore. Together, the merged entity would have loans of roughly Rs. 17.33 lakh crore. PFC already owns 52.63% of REC, and the Government of India owns about 56% of PFC. So, this merger brings two already government-controlled lenders into one much larger institution.
The government says this will create a stronger lender to finance power, renewable energy, and transmission projects. But both PFC and REC mainly lend to the power sector. That includes loans to state electricity distribution companies, many of which regularly struggle with losses and delayed payments. After the merger, one single institution will carry a much larger exposure to this same sector. This increases concentration of risk rather than reducing it.
Another issue is capital strength. When a lenderās loan book becomes much larger, it needs enough own capital to absorb losses if projects fail or payments are delayed. If the balance sheet expands to over Rs. 17 lakh crores without fresh capital, the cushion becomes tighter. Bigger size alone does not make the institution safer. What matters is how much capital backing those loans and how strong the borrowers are.
There are also regulatory limits. Large lenders cannot lend unlimited amounts to a single borrower or sector. These rules will still apply after the merger. In fact, a bigger institution that focuses heavily on one sector may hit those limits faster when financing large power or infrastructure projects.
The International Monetary Fund (IMF) in its recent India assessments has warned that state owned NBFCs with heavy exposure to infrastructure and power can create financial stability risks, especially because they are closely linked to banks and capital markets. The IMF has not commented on this specific merger. But its concern about concentration and spillover risk is directly relevant here. If one very large lender faces stress, the effects can spread more widely across the financial system.
Both PFC and REC are currently profitable and important institutions. The merger is presented as a move to build scale and efficiency. The core question is simple. Does combining them truly reduce risk and strengthen public financing, or does it create one very large lender that carries even more concentrated exposure to a sector that is already financially stressed. Bigger does not automatically mean safer.
