New Delhi, June 30 -- The long-awaited PFC-REC merger, which won board approval late Sunday, creates a stronger balance sheet and a larger lending institution. But the merged entity could face higher borrowing costs in the near term, as investor exposure limits would narrow its bond investor base, market experts said, also calling for a diversified funding basket.

The merger combines two of India's largest bond issuers into one. That 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...