Tuesday, June 26, 2012

Banks' power sector exposure might result in bad loans

Power sector woes might result in significant bad loans in the Indian banking system, whose exposure to this segment is projected to touch Rs 9 lakh crore in next three years, says a report.
Acute shortage of coal for power projects as well as worsening health of distribution companies (discoms) remain major worries for the sector.
"The government's and companies' continued inability to address the challenges in the power sector may result in significant NPLs (Non Performing Loans) in banking sector over the next 2-3 years," brokerage firm Kotak Securities has said.
In a recent report, the entity noted that new power projects having a total capacity of 40-50 GW could be in danger of defaulting on their debt obligations.
"We estimate the banking system's exposure (including loans from PFC and REC) to the power sector will rise to Rs 9 trillion (Rs 9 lakh crore) by the end of FY 2015 from Rs 5.3 trillion (Rs 5.3 lakh crore) at the end of FY 2012 (19% CAGR in FY 2012-15E)," the report noted. PFC and REC are leading state-run lenders to the power sector.
Pointing out that the central government's effort to address coal-supply and pricing challenges "is quite timid," it said that a sharp rise is expected in NPLs in power generation sector as well as increase in SEB (State Electricity Board) losses over the next 2-3 years.
Even though, the government is taking initiatives to ease fuel supply scenario for the power sector, many existing and upcoming projects are faced with severe coal shortage. Amid rising concerns about defaults in the banking system, the government is working on plans to restructure the debt burden of state discoms.
The precarious health of discoms has been mainly blamed on lower tariff realisation and efficiency issues.

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