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The risks of power financing

The risks of power financing
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First Published: Tue, Apr 19 2011. 08 07 PM IST

Updated: Tue, Apr 19 2011. 08 07 PM IST
New Delhi: Power financing is a risky business. For non-banking finance companies such as PFC and REC, these risks are multiplying not from growth deceleration but due to loan book concentration. Due to restrictions on exposure limits, power financing companies were left with no option but to increase their lending to state electricity boards (SEBs). According to analysts at Religare Institutional Research, loans to SEBs constitute 60-80% of the PFC and REC’s total loan book composition. Even though SEBs did not default on repayment obligations till now, increasing losses at their end is a cause for concern.
Religare Capital Markets analysts note:
SEB losses have increased sharply over the past few years, raising questions over the asset quality of power-financing NBFCs. As per PFC’s report on the performance of state power utilities (data available till FY09 only), aggregate losses of all utilities (excluding subsidy booked or received) have gone up significantly in the last 2–3 years. According to our power sector analyst, total SEB losses (pre-subsidy) stand at around 1% of total GDP.
Lack of reforms and decreasing subsidy support from state governments is impacting the financial health of SEBs. According to Religare Capital Markets, cash losses at the SEBs increased more than four-fold to Rs 28,400 crore in 2008-9 from Rs 6,500 crore in 2007-8. These increasing losses, if not contained at this stage, can delay repayment obligations. This will lead to restructuring of the loans, which can significantly impact profitability of the power-financing NBFCs.
The analysts write:
NBFCs and banks may also be compelled to restructure their exposure to ailing SEBs if state governments fail to support their respective boards. We note that REC had earlier rescheduled a part of its loans; however, total rescheduled loans have come down in recent years due to the escrow mechanism. If these NBFCs were to sacrifice the interest or principal in the course of restructuring, their profitability could be significantly eroded.
The rising interest rate environment worsens the outlook for these firms. Benign interest rates in the last two years helped power-financing firms to significantly improve margins. With cost of funds set to rise, stepping up the vigil on possible defaults is the only option for power-financing NBFCs.
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First Published: Tue, Apr 19 2011. 08 07 PM IST
More Topics: Markets Update | Finance | Liquidity | Religare | SEB |