5.8 Provisions, Contingent Liabilities and

Contingent Assets

(i) Provisions are recognised when the Company has a
present legal or constructive obligation as a result
of a past event, if it is probable that the Company
will be required to settle the obligation and a
reliable estimate can be made of the amount of
the obligation.

(ii) The amount recognised as a provision is the best
estimate of the consideration required to settle the
present obligation at the end of the reporting period,
taking into account the risks and uncertainties
surrounding the obligation.

(iii) When some or all of the economic benefits required
to settle a provision are expected to be recovered
from a third party, a receivable is recognised as an
asset if it is virtually certain that reimbursement will
be received and the amount of the receivable can be
measured reliably.

(iv) Where it is not probable that an outflow of economic
benefits will be required or the amount cannot be
estimated reliably, the obligation is disclosed as
contingent liability in notes to accounts, unless
the probability of outflow of economic benefits
is remote.

(v) Contingent assets are not recognised in the financial
statements. However, contingent assets are
disclosed in the financial statements when inflow of
economic benefits is probable.

5.9 Recognition of Income and Expenditure

(i) Interest income, on financial assets subsequently
measured at amortised cost, is recognised using the
Effective Interest Rate (EIR) method. The Effective
Interest Rate (EIR) is the rate that exactly discounts
estimated future cash receipts through expected
life of the financial asset to that asset's net carrying
amount on initial recognition.

(ii) Interest on financial assets subsequently measured
at fair value through profit and loss (FVTPL), is
recognised on accrual basis in accordance with
the terms of the respective contract and disclosed
separately under the head 'Interest Income'

(iii) Rebate on account of timely payment of dues by
borrowers is recognised on receipt of entire dues in
time, in accordance with the terms of the respective
contract and is netted against the corresponding
interest income.

(iv) Income from services rendered is recognised based
on the terms of agreements / arrangements with
reference to the stage of completion of contract at
the reporting date.

(v) Dividend income from investments including those
measured at FVTPL, is recognised in Statement of
Profit and Loss under the head 'Dividend Income'
when the Company's right to receive dividend is
established and the amount of dividend can be
measured reliably.

(vi) Interest expense on financial liabilities subsequently
measured at amortised cost is recognised using
Effective Interest Rate (EIR) method.

(vii) Other income and expenses are accounted on
accrual basis, in accordance with terms of the
respective contract.

(viii) A Prepaid expense up to H 1,00,000/- is recognised as
expense upon initial recognition in the Statement of
Profit and Loss.

5.10 Foreign Currency Transactions and

Translations

Foreign currency transactions are translated into the

functional currency using exchange rates at the date of

the transaction.

At the end of each reporting period, monetary items
denominated in foreign currency are translated using
exchange rates prevailing on the last day of the reporting
period. Exchange differences on monetary items are
recognised in the Statement of Profit and Loss in the period
in which they arise. However, for the long-term monetary
items recognised in the financial statements before April
01, 2018, such exchange differences are accumulated in a
"Foreign Currency Monetary Item Translation Difference
Account" and amortised over the balance period of such
long term monetary item."

5.11 Employee Benefits

(i) Defined Contribution Plan

Company's contribution paid / payable during the
reporting period towards pension is charged in the
Statement of Profit and Loss when employees have
rendered service entitling them to the contributions.

(ii) Defined Benefit Plan

The Company's obligation towards provident fund,
gratuity to employees and post-retirement benefits
such as medical benefit, economic rehabilitation
benefit, and settlement allowance after retirement
are determined using the projected unit credit
method, with actuarial valuations being carried out
at the end of each annual reporting period. Actuarial
gain / loss on re-measurement of gratuity and
other post-employment defined benefit plans are
recognised in Other Comprehensive Income (OCI).
Past service cost is recognised in the Statement of
Profit and Loss in the period of a plan amendment.

(iii) Other long-term employee benefits

The Company's obligation towards leave
encashment, service award scheme is determined
using the projected unit credit method, with
actuarial valuations being carried out at the end of
each annual reporting period. These obligations are
recognised in the Statement of Profit and Loss.

(iv) Short term employee benefits

Short term employee benefits such as salaries and
wages are recognised in the Statement of Profit and
Loss, in the period in which the related service is
rendered at the undiscounted amount of the benefits
expected to be paid in exchange for that service.

(v) Loan to employees at concessional rate

Loans given to employees at concessional rate are
initially recognised at fair value and subsequently
measured at amortised cost. The difference between

the initial fair value of such loans and transaction
value is recognised as deferred employee cost upon
issuance of Loan, which is amortised on a straight¬
line basis over the expected remaining period of the
loan. In case of change in expected remaining period
of the loan, the unamortised deferred employee
cost on the date of change is amortised over the
updated expected remaining period of the Loan on
a prospective basis.

5.12Material Prior Period Errors

Material prior period errors are corrected retrospectively
by restating the comparative amounts for the prior
periods presented in which the error occurred. If the
error occurred before the earliest period presented, the
opening balances of assets, liabilities and equity for the
earliest period presented, are restated.

5.13Income Taxes

I ncome Tax expense comprises of current and deferred
tax. It is recognised in Statement of Profit and Loss, except
when it relates to an item that is recognised in OCI or
directly in equity, in which case, tax is also recognised in
OCI or directly in equity.

(i) Current Tax

Current tax is the expected tax payable on taxable
income for the year, using tax rates enacted or
substantively enacted and as applicable at the
reporting date, and any adjustments to tax payable
in respect of earlier years.

Current tax assets and liabilities are offset when
there is a legally enforceable right to set off the
recognised amounts and there is an intention to
settle the asset and liability on a net basis.

(ii) Deferred Tax

Deferred tax is recognised on temporary differences
between the carrying amounts of assets and
liabilities in the financial statements and the
corresponding tax bases used in the computation of
taxable income. Deferred tax is measured at the tax
rates based on the laws that have been enacted or
substantively enacted by the reporting date, based
on the expected manner of realisation or settlement
of the carrying amount of assets / liabilities. Deferred
tax assets and liabilities are offset when there is a
legally enforceable right to set off current tax assets
against liabilities, and they relate to income taxes
levied by the same tax authority.

A deferred tax liability is recognised for all taxable
temporary differences. A deferred tax asset is

recognised for all deductible temporary differences
to the extent that it is probable that future taxable
profits will be available against which the deductible
temporary difference can be utilised. Deferred tax
assets are reviewed at each reporting date and are
reduced to the extent that it is no longer probable
that the related tax benefit will be realised.

5.14Earnings Per Share

Basic earnings per equity share is calculated by dividing
the net profit or loss attributable to equity shareholders
of the Company by the weighted average number of
equity shares outstanding during the financial year.

To calculate diluted earnings per share, the net profit or
loss for the period attributable to equity shareholders
and the weighted average number of shares outstanding
during the period are adjusted for the effects of all dilutive
potential equity shares.

5.15 Expenditure on issue of shares

Expenditure on issue of shares is charged to the securities
premium account.

5.16 Dividends

Final dividends are recorded as a liability on the date of
approval by the shareholders and interim dividends are
recorded as a liability on the date of declaration by the
Board of Directors of the Company.

5.17 Business Combination under Common
Control

A business combination involving entities or businesses
under common control is a business combination in which
all of the combining entities or businesses are ultimately
controlled by the same party or parties both before
and after the business combination and that control is
not transitory.

Business combinations involving entities or businesses
under common control are accounted for using the
pooling of interest method as follows:

• The assets and liabilities of the combining entities
are reflected at their carrying amounts.

• No adjustments are made to reflect fair values, or
recognise new assets or liabilities. Adjustments
are made only to harmonise material accounting
policy information.

• The financial information in the financial statements
in respect of prior periods is restated as if the business

combination has occurred from the beginning of
the preceding period in the financial statements,
irrespective of the actual date of the combination.

The balance of the retained earnings appearing in the
financial statements of the transferor is aggregated with
the corresponding balance appearing in the financial
statements of the transferee. The identity of the reserves
is preserved and the reserves of the transferor become
the reserves of the transferee.

The difference, if any, between the amounts recorded as
share capital issued plus any additional consideration in
the form of cash or other assets and the amount of share
capital of the transferor is transferred to capital reserve
and is presented separately from other capital reserves.

6. USE OF ESTIMATES AND MANAGEMENT
JUDGEMENT

In preparation of the Standalone Financial Statements, the
Management is required to make judgements, estimates
and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses and the related
disclosures. The estimates and underlying assumptions
are based on historical experience & other relevant factors
and are reviewed on an ongoing basis. Actual results may
differ from these estimates.

Changes in accounting estimates, if any, are recognised
prospectively in the period in which the estimate is revised
if the revision affects only that period or in the period of
the revision & future periods if it affects both current &
future periods.

6.1 Significant Management Judgements

I n order to enhance understanding of the Standalone
Financial Statements, information about significant
areas of critical judgements, apart from those involving
estimation (Note 6.2), in applying accounting policies
that have the most significant effect on the amounts
recognised in the Standalone Financial Statements, are
as under:

(i) Deferred tax Liability on Special Reserve

The Company had passed a Board resolution
that it has no intention to withdraw any amount
from the Special Reserve created and maintained
under Section 36(1)(viii) of the Income Tax Act,
1961. Accordingly, the Special Reserve created and
maintained cannot be withdrawn and as there is no
future tax incidence, the Company does not create
deferred tax liability on the said reserve.

(ii) Non recognition of income on Credit Impaired
loan assets

As a matter of prudence, income on credit impaired
loan assets is recognised as and when received or
on accrual basis when expected realisation is higher
than the loan amount outstanding.

(iii) Amortisation of transaction cost on credit impaired
loan assets

Outstanding amount of unamortised transaction
cost is credited to Statement of Profit and Loss on
classification of loan asset as credit impaired.

(iv) Classification of Investments

I n order to classify an investment in a company as
investment in subsidiary or joint venture (JV) or
associate, judgement is required to assess the level of
control depending upon the facts and circumstances
of each case.

(a) The Company along with its subsidiary RECL is
holding 21.49 % stake in equity share capital of
Energy Efficiency Services Limited (EESL). However,
in the absence of any practical ability to direct the
relevant activities as per the requirements of Ind AS
28'Investment in Associates and Joint Ventures', the
Company does not have any significant influence,
accordingly EESL has not been considered as an
associate company.

(b) Ultra-Mega Power Projects (UMPPs) are managed
as per the mandate from Government of India (GoI)
and the Company does not have the practical ability
to direct the relevant activities of these UMPPs
unilaterally. The Company therefore, considers its
investment in respective UMPPs as associates having
significant influence despite the Company holding
100% of their paid-up equity share capital.

(c) By virtue of holding Board position or equity stake
in borrower companies, the rights exercised by PFC
in such companies are protective in nature. Thus,
the borrower companies are not considered as
Associates for the purpose of financial statements.

(v) Low value leases

An assessment is required, if lessee opts not to apply
the recognition and measurement requirements of
Ind AS 116 'Leases' to leases where the underlying
asset is of low value. For the purpose of determining
low value, the Company has considered nature of
assets and concept of materiality as defined in Ind
AS 1 'Presentation of Financial Statements' and
the conceptual framework of Ind AS which involve
significant judgement.

(vi) Sundry Liabilities - Interest Capitalisation
Unrealised income on credit impaired loans,
represented by Funded Interest Term Loan (FITL) /
debt / equity instruments acquired under resolution,
is transferred to a separate account titled 'Sundry
Liabilities Account (Interest Capitalisation)' and
is recognised in Statement of Profit and Loss on
repayment of FITL or sale / redemption of debt /
equity instruments.

(vii) Evaluation of indicators for impairment loss
allowance of financial assets

The evaluation of the applicability of indicators for
computation of impairment loss allowance of assets
requires assessment of several external and internal
factors which could result in change in recoverable
amount of the assets. The Company makes
significant judgement in identifying the default and
significant increase in credit risk (SICR) based on
available information.

6.2 Assumptions and Key Sources of Estimation
Uncertainty

Information about estimates and assumptions that have
the significant effect on recognition and measurement of
assets, liabilities, income and expenses is provided below:

(i) Defined Benefit Obligation (DBO)

The Company's estimate of the DBO is based on a
number of underlying assumptions such as standard
rates of inflation, mortality, discount rate and
anticipation of future salary increases. Variation in
these assumptions may significantly impact the DBO
amount and the annual defined benefit expenses as
detailed at Note 44.2.

(ii) Impairment test of Financial Assets (Expected Credit
Loss)

The measurement of impairment loss allowance
for financial assets which includes loan, LoCs,
LoUs and guarantees measured at amortised cost
requires use of statistical models, expected future
economic conditions, estimated cash flows and
credit behaviour (e.g., inputs and weights used for
credit risk scoring, likelihood of borrowers defaulting
and resulting losses). The cash flows expected to be
recovered from credit impaired loans are assessed
based on the borrower's financial situation, current
status of the project, bid-value, resolution plan
amount, OTS amount as available.

(iv) Income Taxes

Estimates are involved in determining the provision
for income taxes, including amount expected to be
paid / recovered for uncertain tax positions and also
in respect of expected future profitability to assess
deferred tax asset. Refer Note 37 for details.

(v) Useful life of Property, Plant & Equipment (PPE) and
Intangible Assets

The Company reviews its estimate of the useful
lives of depreciable / amortisable assets at the end
of each financial year, based on the expected utility
of the assets. Uncertainties in these estimates
relate to technical and economic obsolescence that
may change the utility of assets. Refer Note 15 for
details on useful lives and carrying values of PPE and
Intangible assets.

17.1 The Company raises funds through various instruments including non-convertible bond issues. During the year, the Company
has not defaulted in servicing of any of its debt securities.

17.2 The amounts raised during the year have been utilised for the stated objects in the offer document/Information memorandum/
facility agreement other than temporary deployment pending application of proceeds.

17.3 All the secured listed non-convertible debt securities of the Company are fully secured by way of mortgage on specified
immovable properties and/or charge on receivables of the Company. The Company has maintained security cover of 1.03
times as per the terms of offer document / information memorandum sufficient to discharge the principal and interest
thereon at all times for the secured listed non-convertible debt securities issued.Further, security cover maintained by the
Company for all secured non-convertible debt securities is 1.02 times.

17.4 Wherever required, the Company has registered the charges with respective Registrars of Companies (ROC) within the
statutory timelines.

18.13 None of the borrowings have been guaranteed by Directors.

18.14 There has been no default in repayment of borrowings and interest during periods presented above.

18.15 The amounts raised during the year have been utilised for the stated objects in the offer document/Information
memorandum/facility agreement.

18.16 The Company has not received any fund which are material either individually or in the aggregate from any person(s) or
entity(ies), including foreign entities ("Funding Parties"), with the understanding, whether recorded in writing or otherwise,
that the Company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner
whatsoever by or on behalf of the Funding Party ("Ultimate Beneficiaries") or provide any guarantee, security or the like on
behalf of the Ultimate Beneficiaries.

19. SUBORDINATED LIABILITIES

The Company has categorised Subordinated Liabilities at amortised cost in accordance with the requirements of Ind AS 109

'Financial Instruments'.

The Company had issued Perpetual Debt Instruments (PDI) of H 100 crore having face value of H 1 crore each, with no maturity
and callable only at the option of the Company after minimum 10 years with prior approval of RBI. The claims of the holders of
the PDI are:

(a) Superior to the claims of the holders of the equity shares issued by the Company and perpetual non-cumulative preference
shares, if any, of the Company; and

(b) Subordinated to the claims of all other creditors of the Company (but pari-passu inter se the holders of the PDIs). The
Company may defer the payment of Coupon, if:

(i) The capital to risk assets ratio ("CRAR") of the Company is below the minimum regulatory requirement prescribed by
RBI; or

(ii) the impact of such payment results in CRAR of the Company falling below or remaining below the minimum regulatory
requirement prescribed by RBI. Further, it also has certain unique features which, inter-alia, grant PFC, in consultation
with RBI a discretion in terms of writing down the principal / interest, to skip interest payments, to make an early recall
etc. without commensurate right for investors to legal recourse, even if such actions might result in potential loss
to investors. As these securities are perpetual in nature and claim of PDI holders is subordinate to claim of all other
creditors and further as the Company does not have an unconditional right not to pay the coupon, these have been
classified under subordinated liabilities.

(vii) General Reserve:

General Reserve includes the amounts appropriated from the profits of the Company before declaration of dividend (as
was required under erstwhile Companies Act, 1956). It also includes the amount transferred from Statutory Reserves on
utilisation / reversal of such Reserves. Further the Company appropriates profit to General Reserve in order to avail full
eligible deduction of Special Reserve under Section 36(1 )(viii) of the Income Tax Act, 1961.

(ii) Events occurring after Balance Sheet date:

Board of Directors in its meeting held on 21.05.2025 has proposed final dividend @ 20.50% on the paid up equity share
capital i.e. H 2.05 /- per equity share of H 10/- each for the FY 2024-25 subject to approval of shareholders in ensuing Annual
General Meeting.

(iii) The Dividend Paid/Proposed is in compliance with the provisions of Section 123 of Companies Act 2013, as applicable.

35. CORPORATE SOCIAL RESPONSIBILITY

In accordance with the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 notified w.e.f. 22.01.2021,
any unspent amount pursuant to any ongoing project shall be transferred to unspent CSR Account in any scheduled bank
within a period of thirty days from the end of the financial year, to be utilised within a period of three financial years from
the date of such transfer, after which any unspent CSR amount, if any shall be transferred to a Fund specified in Schedule VII,
within a period of thirty days from the date of completion of the third financial year. Any unspent CSR amount, other than
for any ongoing project, shall be transferred to a Fund specified in Schedule VII, within a period of six months of the expiry of
the financial year. Further, if the Company spends an amount in excess of the requirement under statute, the excess amount
may be carried forward and set off in three succeeding financial years against the amount to be spent.

As the notification was made effective during FY 2020-21, the Company complied with the amended provisions of Section 135
of the Companies Act, 2013 with effect from the FY 2020-21. Accordingly, the unspent CSR amount up to 31.03.2020 would
continue to be dealt with in accordance with the pre-amendment framework.

* Sanctioned to various projects where disbursement is being made as per agreed terms.

$ includes H 2.44 crore (Previous year H 10.84 crore) disbursed where utilisation is pending.

# Includes a contribution of H 1.90 crore (Previous year H Nil) to the 'Swachh Bharat Kosh' from the unutilised amounts of completed or short-closed CSR projects.

@ Since amount pertains to ongoing projects, it has been transferred to unspent CSR Account on 30.04.2025 (previous year on 30.04.2024).

35.2 Unspent CSR amount of H81.92 crore (Previous year H 116.02 crore) pertains to multi-year (ongoing) projects where payment is
made in tranches upon achievement of milestone. Accordingly, the said amount has been deposited in unspent CSR Account
with scheduled bank as per requirements of Section 135(6) of Companies Act, 2013. The cumulative amount of unspent CSR
expense as on 31.03.2025 is H 267.06 crore (previous year H 237.81 crore).

39. CAPITAL MANAGEMENT

The Company maintains a capital base that is adequate to support the Company's risk profile, regulatory and business
needs. The Company sources funds from domestic and international financial markets, inter-alia leading to diverse investor
base and optimised cost of capital. Refer Note 17, 18 and 19 for details w.r.t. sources of funds and refer Standalone Statement
of Changes in Equity for details w.r.t Equity.

As contained in Master Direction- Reserve Bank of India (Non-Banking Financial Company - Scale Based Regulation)
Directions, 2023, as amended from time to time (hereinafter referred to as "RBI Master Directions"), the Company is required
to maintain a capital ratio consisting of Tier I and Tier II capital which shall not be less than 15% of its aggregate risk weighted
assets on-balance sheet and of risk adjusted value of off-balance sheet items. Out of this, Tier I capital shall not be less than
10%. The Company regularly monitors the maintenance of prescribed levels of Capital to Risk Weighted Assets Ratio (CRAR).
Further, with regard to capital restructuring, the Company is also guided, inter alia, by guidelines on "Capital Restructuring
of Central Public Sector Enterprises" issued by Department of Investment and Public Asset Management (DIPAM), Ministry
of Finance, Department of Public Enterprises in respect of issue of bonus shares, dividend distribution, buy back of equity
shares etc.

However, the Company may also consider various internal factors which inter-alia includes net-worth and capacity to borrow,
CAPEX / business expansion needs; additional investments in subsidiaries / associates of the Company etc. The detailed
Dividend Distribution Policy is available on the Company's website. For details of dividend paid / recommended during the
year, refer Note 24.2.

40. FINANCIAL RISK MANAGEMENT

The Company is exposed to several risks which are inherent to the environment that it operates in. The Company is into
business of extending financial assistance to power, logistics and infrastructure sector. The principal risks which are inherent
with the Company's business model and from its use of financial instruments include credit risk, liquidity risk and market risk
(currency risk, interest rate risk and price risk).

The following table broadly explains sources of risks which the Company is exposed to and how it manages the same and
related impact in the financial statements:

39.3 Dividend Distribution Policy

The Company has a well-defined dividend distribution policy. Dividend distribution policy focuses on various factors
including but not limited to Gol guidelines, RBI circulars / guidelines, future capital expenditure plans, profits earned during
the financial year, cost of raising funds from alternate sources, cash flow position and applicable taxes if any, subject to the
guidelines as applicable from time to time.

Being a Central Public Sector Enterprise, the Company is required to comply with the guidelines on "Capital Restructuring of
Central Public Sector Enterprises" issued by DIPAM, Govt. of India. As per DIPAM Guidelines, every CPSE would pay minimum
annual dividend of 30% of PAT or 4% of the net-worth, whichever is higher subject to the limit, if any, under any extant legal
provision. Financial sector CPSEs like NBFCs (applicable to PFC) may pay minimum annual dividend of 30% of PAT subject to
the limit, if any, under any extant legal provisions.

Further, DIPAM advised that CPSEs may consider paying interim dividend every quarter after quarterly results, or at least
twice a year. Further, all listed CPSEs should consider paying at least 90% of projected annual dividend, in one or more
instalments, as interim dividend.

For managing these risks, the Company has put in place an integrated enterprise-wide risk management mechanism to ensure
that these risks are monitored carefully and managed efficiently. In accordance with the RBI Master Direction in order to augment
risk management practices in the Company, the Company has a Chief Risk Officer (CRO) who is involved in the process of
identification, measurement and mitigation of risks. The Company also has a Board level Risk Management Committee (BLRMC),
whose main function is to monitor and review the risk management plan of the Company and to make recommendations to the
Board of Directors for taking up various risk management activities. The Chief Risk Officer (CRO) is a permanent invitee to all the
meetings of Risk Management Committee. The risk management approach i.e., Company's objectives, policies and processes
for identifying, measuring and managing each of above risk is set out in the subsequent paragraphs.

40.1 Credit Risk

Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss to the Company by failing to
discharge its obligation. Details of financial assets that expose the Company to credit risk are:

^(a) Credit risk on cash and cash equivalents and other bank balances is limited as these are held with scheduled commercial public sector banks, high
rated private sector banks and mutual fund houses, which meets the empanelment criteria as set out in the Company's policy. The Company has
also set exposure limits for deployment of funds in various types of instruments with respective banks / mutual fund houses.

For investments, the Company manages its exposure to credit risk by periodically monitoring such investments, and applying the appropriate
valuation techniques to arrive at the carrying value. The Company carries an impairment loss allowance of H 72.95 crore on its investments as at
31.03.2025 (as at 31.03.2024 H 72.95 crore).

^(b) Credit risk on other financial assets and trade receivables is evaluated based on Company's knowledge of the credit worthiness of those parties and
managed by monitoring the recoverability of such amounts. The Company carries an impairment loss allowance of H 29.90 crore on its other financial
assets and trade receivables as at 31.03.2025 (as at 31.03.2024 H 22.27 crore).

^(c) The Company is exposed to credit risk primarily through its lending operations. The same is explained in the paragraphs below.

40.1.1 Credit Risk Management for Lending Operations

The Company has put in place key policies and processes for managing credit risk, which include formulating credit policies,
guiding the Company's appetite for credit risk exposures, undertaking reviews & objective assessment of credit risk,
and monitoring performance and management of portfolios. All the procedures and processes of the Company are ISO
9001:2015 certified.

The credit risk management covers two key areas, i.e., project appraisal & project monitoring. The Company selects the
borrowers in accordance with the Company's approved credit policy, which inter alia, defines factors to be considered for
rating of the borrower / project. The Company's customer selection procedure assesses viability of project along with that of
its promoting entity. Rate of interest and maximum admissible exposure is, inter alia, based on internal rating awarded by
the Company.

(i) Appraisal of Projects

The Company follows a systematic, institutional project appraisal process to assess the credit risk before financing
any project.

(a) Appraisal for Private Sector Projects

For private sector projects, a two-stage appraisal process is followed. Initially a preliminary appraisal is carried
out in order to decide the prima facie preparedness of the project to be taken up for detailed appraisal. Detailed
appraisal is carried out for those projects shortlisted on the basis of preliminary appraisal.

The Company along with evaluation of project viability also assesses the ability of its promoter(s) to contribute
equity and complete the project. The Company follows an integrated rating methodology whereby Integrated
Rating (IR) is calculated using the weighted average of the scores of the project grading and promoter grading.
Based on the IR of the project, terms and conditions (including security package, interest rate and debt-equity
ratio) are stipulated.

(b) Appraisal for State Sector Projects

State sector projects are taken up for detailed appraisal to determine, inter-alia, if they are techno economically /
financially sound and compatible with integrated power development & expansion plans of the State.

The Company classifies state power generation utilities into various risk rating grades based on the evaluation of
utility's performance against specific parameters covering operational and financial performance. With regards to
transmission utilities, the Company adopts the categorisation of its subsidiary RECL as per its policy. With regard
to State Power Distribution utilities including integrated utilities, the Company's categorisation policy provides for
adoption of Ministry of Power's (MoP's) Integrated Ratings by aligning such ratings / grading with that of Company's
rating structure. The categorisation of Borrowers in the Logistics and Non-Power Infrastructure sector is carried
out on the basis of recommendations of the Internal Committee considering the strengths and weaknesses of
the project.

Such categories / ratings are used to determine security requirements and pricing of loans given to the State
Sector Borrowers. The Company also has a mechanism in place for monitoring the exposure to borrowers.

The detailed project appraisal involves technical and financial appraisal covering various aspects such as project
inputs, statutory and non-statutory clearances, contracts, implementation plan, project linkages, financial
modelling / projections, calculation of returns, sensitivity analysis etc.

After detailed analysis indicated above, the overall viability of the project and entity is assessed and various
conditions in the form of pre-commitment, pre-disbursement and other conditions are stipulated so as to ensure
tying up of funds (debt and equity both), all physical inputs, appropriateness of all the contracts, compliance of
conditions precedent in agreements / contracts / statutory and non- statutory clearances related to the project
etc. and in general to ensure bankability of the project & protection of the interest of the Company as a lender
for timely servicing of debt. The Company has an authorisation / delegation structure for the approval of credit
facilities commensurating with the size of the loan.

(ii) Security and Covenants

The Company stipulates a package of security measures / covenants to mitigate risks during the construction and
post COD (commercial operation date) stage of the project. Based on the risk appetite and appraisal of the project, the
Company adopts a combination of the following measures:

(a) Primary Security -Charge on Project Assets and / or State Government Guarantees

(b) Collateral Securities - Corporate guarantee, Personal guarantee of promoters, Pledge of shares, Charge on assets /
revenues of group/other companies

(c) Payment Security Mechanism - Escrow Account / Letter of Credit, Trust and Retention Account (TRA)

(d) Other covenants - Assignment of all project contracts, documents, insurance policies in favour of the Company,
Upfront equity requirement, Debt Service Reserve Account (DSRA), Debt Equity ratio, shareholders' agreements,
financial closure, etc.

(iii) Project Monitoring

The Company has comprehensive project / loan monitoring guidelines that captures aspects relating to monitoring,
tracking of project construction, implementation, identifies risks where intervention is required to minimise the time /
cost overruns / consequent slippages in disbursements and including progress of commissioned projects.

For State sector projects, monitoring is being carried out on the basis of project progress details obtained regularly from
borrowers, site visits, discussions with the borrowers, information/reports available on Central Electricity Authority's
(CEA) website etc.

For private sector, where the Company is Lead Financial Institution (FI), the Company engages Lenders' Engineers
(LEs) / Project Management Agency (PMA) (a single entity, thereby facilitating better coordination of project
monitoring activities) / Lenders' Financial Advisors (LFAs), which are independent agencies to act on behalf of various
lenders / consortium members. The PMA / LEs conduct periodic site visits, review relevant documents, discusses with
the borrowers and submit its reports on progress of the project. LFAs submit the statements of fund flow and utilisation
of funds in the project periodically. In cases the Company is not the lead FI, the tasks related to PMA / LEs and LFAs
services are coordinated with the concerned lead lender.

Also, the consolidated periodic progress report of certain projects is prepared comprising important observations /
issues viz. areas of concern, reasons for delay, issues affecting project construction / implementation etc. and is reviewed
by the Company on a regular basis.

The Company continuously monitors delays and / or default of borrowers and their recoverability. On occurrence of
default in the borrower's account, the Company initiates necessary steps which may involve action(s) including, but
not limited to, Special Mention Account (SMA) reporting to RBI, credit information reporting to Central Repository
of Information on Large Credits (CRILC) etc., regularisation of the account by recovering all over dues, invocation of
guarantees / securities to recover the dues, conversion of loan into equity as per loan agreement, restructuring of loan
account, formulating resolution plan with the borrower, change in ownership, Corporate Insolvency Resolution Process
(CIRP) under IBC -2016, sale of the exposures to other entities/investors, other recovery mechanisms like referring
the case for legal action before Debt Recovery Tribunal (DRT), SARFAESI, etc. and other actions as specified under
regulatory / legal framework.

40.1.2 Credit Risk Measurement - Impairment Assessment for Lending Operations

(i) Staging of loans

Ind-AS 109 outlines a three staged model for measurement of impairment based on changes in credit risk since initial
recognition. For classification of its borrowers into various stages, the Company uses the following basis:

- A financial asset that is not credit impaired on initial recognition is classified in 'Stage 1'.

- If a significant increase in credit risk (SICR) is identified, the financial asset is moved to 'Stage 2'.

An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting
date by considering the change in the risk of default occurring over the remaining life of the financial assets. In
accordance with Ind AS 109 'Financial Instruments', the Company has applied rebuttable presumption that considers
more than 30 days past due as a parameter for determining significant increase in credit risk. Further, in case of private
sector borrowers, other factors like downgradation in external credit rating to 'C-', restructuring resulting in asset
downgradation as per IRAC norms, delay in commissioning of project for more than 4 years are also considered.

- If the financial asset is credit-impaired, it is moved to 'Stage 3' category.

In case of Stage 3 financial assets, after implementation of the resolution plan (except for change of ownership and/or
resolution through NCLT), the financial asset is upgraded and classified as Stage 2 for four quarters from the date of
implementation of resolution plan.

(ii) Default

In accordance with Ind AS 109 'Financial Instruments', the Company considers the rebuttable presumption to define
a financial asset as in default, i.e. when the loan account is more than 90 days past due on its contractual payments.
Credit impaired financial assets are aligned with the definition of default.

(iii) Measurement of Expected Credit Loss (ECL)

The Company recognises impairment loss allowance for the financial assets in accordance with a Board-approved
expected credit loss (ECL) policy. ECL is measured on either a 12 month or lifetime basis depending on whether there
is significant increase in credit risk since initial recognition. ECL is the product of Probability of default (PD), Loss Given
Default (LGD) and Exposure at Default (EAD). The Company has appointed an independent agency, CRISIL Ltd., for
assessment of ECL in accordance with Ind AS 109 'Financial Instruments'. The brief methodology of computation of ECL
is as follows:

(a) Probability of default (PD)

PD is an estimate of the likelihood of default over a given time horizon. It is estimated as at a point in time. For
assessing 12-month PD, probability of a loan defaulting in next 12 months is ascertained and similarly for assessing
lifetime PD, probability of a loan defaulting in its remaining lifetime is ascertained.

For Stage 1 accounts, 12 months PD is used.

For Stage 2 (significantly increased credit risk accounts), Lifetime PD is used.

For Stage 3 (credit impaired accounts), 100% PD is taken.

12-month PD: In case of State Sector borrowers, for the purpose of PD calculation, the risk rating grades of the
utilities are considered. For Gencos / Transcos / Others, PFC's internal rating grades have been considered. For
Discoms / Power Department borrowers, PFC has adopted the MoP ratings. The ratings as above has been be
mapped with the standard external rating benchmarks. The PD factor associated with the mapped external rating
as given in the PD transition matrix published by various CRAs have been used for PD calculation.

In case of Private sector borrowers, the latest external rating as published by various Credit Rating Agencies have
been referred to compute PD using the PD transition matrix published by various CRAs. If external rating is not
available, the PD has been computed through Proxy Risk Scoring Model on a 10-point scale with 1 suggesting

minimum risk and 10 suggesting the highest risk. The said model uses the Quantitative financial ratios like Gearing
(Debt / Equity), Return on Capital Employed, Interest Coverage ratio, Debt to EBITDA ratio and qualitative factors
like PLF, ACS / ARR ratio or LAF to arrive at the final Risk score. The financial risk score obtained have been mapped
to external rating benchmarks. This mapped rating has been referred to compute PD associated with the rating
using the PD transition matrix published by various CRAs.

For Lifetime PD: Markov Chain Model has been used to compute Lifetime PDs of the rating grade.

(b) Loss Given Default (LGD)

LGD is the loss factor which the Company may experience in case the default occurs.

For State sector borrowers, the exposure is bifurcated into guaranteed and non guaranteed portion. Flat LGD has
been applied to the exposure amount which is guaranteed by the State. For non guaranteed portion, the Company
considers the credit worthiness of the states on various parameters while estimating the LGD. For estimating the
credit worthiness of the state, parameters like State GDP per capita, Fiscal deficit / GDP ratio, Proportion of infra
and developmental expenditure and Proportion on Revenue Expenditure on Energy Sector, etc. are used as key
inputs. The state utilities are bifurcated into Low, Medium and High-risk category based on the state category.
Moreover, for non-guaranteed portfolio of State Sector borrowers, additional stress factors have been considered
in the estimation of LGD based on their respective rating groups to account for the likelihood of default owing to
borrower's adverse financial conditions or inability to repay.Thus, the Company derives the realisable value of the
assets by considering stress factor(s) based on financial health of the state and rating of the borrower. In case of
Private sector borrowers, LGD has been assessed considering various factors related to the project to arrive at
realisable value of the plant such as generation capacity, project cost per MW, percentage completion of the plant,
and book value of the assets, cost incurred and other relevant information. A stress factor was also applied as a
haircut to arrive at the realisable value.

For Stage 3 borrowers, LGD has been assessed project wise based on Bid value / resolution plan amount/OTS
amount / any other value / discounted cash flows etc. as applicable.

(c) Exposure at Default (EAD)

Exposure at Default is the outstanding exposure on which ECL is computed. EAD includes outstanding principal
and interest accrued and interest overdues on financial assets that the Company expects to be owed in the event
of default in respect of the loan. As per Note 6.1 .(ii), income on credit impaired assets is recognised as and when
received or on accrual basis when expected realisation is higher than the loan amount outstanding, therefore, the
same is not used in computation of Exposure at default.

(d) Key assumptions used in measurement of ECL

The Company considers the date of initial recognition as the base date from which significant increase in credit risk
is determined.

- Since the Company has a right to cancel any sanctioned but undrawn limits to any of its borrowers, EAD is
assumed to be outstanding balance and interest of the loan as on the reporting date.

(e) The calculation of ECL incorporates forward-looking information. Further, the independent agency appointed to
assist the Company in ECL assessment also consider the forward-looking information in the determination of the
impairment allowance to be assigned to the borrower, by taking into consideration various project operational
parameters, project financial ratios, extension of the project completion and also possibility of stressed and
favourable economic conditions. Further, the independent agency has also added some additional macroeconomic
parameters such as Power demand, GDP growth, monthly weighted average prices of traded power and current
account to arrive at a weighted shock factor to the base PD term structure for ECL computation so as to reflect the
right risk assessment of the utilities.