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Bankers face loan default risk in power sector exposure: analysts

Bankers face loan default risk in power sector exposure: analysts
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First Published: Sun, Jun 26 2011. 08 39 PM IST
Updated: Sun, Jun 26 2011. 08 39 PM IST
Mumbai: Indian banks are at an increased risk of defaults on loans to companies linked to the power sector, as mounting losses in state electricity boards and delays in execution of new power plants have made recovery difficult, analysts said.
Credit to the infrastructure sector in general, and power sector in particular, in the past two years has fuelled loan demand. Disbursal to the power sector rose 47% between fiscal 2009 and 2011, more than doubled the 21% rise in total bank credit in the period.
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But analysts have started raising red flags on outstanding loans, fearing default.
In a research note on the bank exposure to this sector on Thursday, Emkay Global Financial Services Ltd analysts Kashyap Jhaveri and Pradeep Agrawal said the power sector has been a key driver of bank credit in the last two years.
“However, with significant rise in the losses of state electricity boards (SEBs), we believe that the risks of NPAs (non-performing assets) or probability of restructuring the loans from the power sector exposure are rising,” they said. “The risks of NPAs or restructuring can come not only from direct exposure to SEBs but also from the fact that the health of merchant power producers depends upon the health of these SEBs.”
SEBs across India are saddled with losses worth crores because of reasons such as power theft during transmission and distribution, billing inefficiencies and, more importantly, because they have to buy expensive power to tide over short-term deficits. Also, the fact that some SEBs have failed to revise tariffs for many years has ballooned losses.
The exact amount of losses by SEBs is not known, but a finance commission report last year estimated 2010-11 losses to increase to Rs 68,643 crore, up from Rs 40,000 crore in fiscal 2010.
The losses are likely to have a direct impact on the finances for private power producers because it diminishes the ability of SEBs to buy power.
SEBs are the largest buyers of power in the country.
In a May report, Edelweiss Securities Ltd pointed out that out of the total credit of Rs 2.8 trillion in fiscal 2009, 2010 and 2011, only Rs 1.8 trillion was utilized for capex (generation, transmission and distribution), leaving Rs 1 trillion unaccounted for.
“In the light of the much-touted poor financial health of SEBs, it is important to find the missing link,” Edelweiss said.
The report names public sector banks such as Oriental Bank of Commerce, Canara Bank, Syndicate Bank Ltd, UCO Bank, Vijaya Bank, Dena Bank and Central Bank of India to have been in the forefront of the lending for working capital requirements, and Power Finance Corp. Ltd (PFC) and Rural Electrification Corp. Ltd lending for capex expansion.
Bankers are, however, not perturbed about the possibility of default, mainly because most of their loans are to SEBs, which are backed by the government.
“As of now, we’ve not seen any sign of stress in the power or infrastructure sector,” said Punjab National Bank chairman and managing director K.R. Kamath.
PNB’s exposure to the power sector is about Rs 16,300 crore, 6.7% of its overall lending portfolio, according to Emkay.
Kolkata-based Allahabad Bank has the highest exposure to the sector as a proportion of its overall loan book. About 13% of its advances, or Rs 12,100 crore, is given to this sector.
Executive director D. Sarkar is not concerned about this as most of the exposure is to the electricity boards.
Another chairman of a public sector bank, who did not want to be named, said analysts do not understand the power business.
“Power sector exposures include generation, transmission, distribution, etc. All those have different risks involved, but analysts club all of them as power sector exposure. Public sector banks have mostly exposure to power distributors backed by the government. There is no question of default on these,” he said.
Bankers’ confidence is probably not entirely misplaced. In 2001, facing a similar situation, the Central government had restructured SEB debt after many of them defaulted on their payments to power generators.
Kameswara Rao, executive director, energy, utilities and mining, at audit and consultancy firm PricewaterhouseCoopers (PwC), said the impact of the debt will be far more severe now than in 2002.
“This time, private sector share in generation has grown. Also, as commercial banks’ exposure is more due to more relaxed sector norms and as many private and state-owned power companies (such as NTPC Ltd, NHPC Ltd) and those in connected business (such as Coal India Ltd, Power Grid Corp. of India Ltd) are listed on stock exchanges, the impact of defaults will spread widely to investors and funds,” he said.
Rao added that there is a growing risk of default, which will eventually cascade on to banks. But analysts said recent government actions to waive or increase tenure of loans to some companies has probably set the precedent for SEBs.
Banks that do not have exposure to the sector are seeing the risks associated with it far more clearly.
“The worsening financial state of the SEBs increases the risk of default in the long term,” said Ajay Mahajan, India head of financial markets and institutional banking, UBS AG. He also pointed to generation issues in the sector linked to the shortage of local supplies of coal largely due to domestic production constraints and rising cost of financing as two other risks for loans.
“We saw that in the case of microfinance institutions and some other companies like Indian Airlines and Kingfisher Airlines Ltd. If it can be done for such small amounts and individual companies, then there is no reason they can’t do it for power, which is a systematically important sector,” said Nilanjan Karfa, analyst at Brics Securities Ltd.
Graphic by Ahmed Raza Khan/Mint
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First Published: Sun, Jun 26 2011. 08 39 PM IST