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Power loan recast not to help India’s ratings, says S&P

Power loan recast not to help India’s ratings, says S&P

Mumbai: The plan to restructure bank loans given to power distribution companies may not immediately affect India’s sovereign rating, but if the practice continues, it could increase the cost of doing business by creating a cycle of “system inefficiencies, technical and commercial losses, and underinvestment in capacity", global rating agency Standard and Poor’s (S&P) cautioned in a report released on Monday.

“This could, in turn, affect the country’s growth prospects in the long run and weigh on the sovereign rating of India," the report said.

S&P had revised India’s rating outlook to “negative" from “stable" in April, which puts the country at BBB-/Negative--the lowest investment grade. A rating downgrade typically comes a year or so after the outlook is revised downwards.

Recent delays in land acquisitions to mine coal and for forest clearances coupled with inefficient mining practices have led to a coal shortage in India, forcing local power producers to import coal and increasing the per unit cost of purchasing power for state electricity boards.

India’s power sector has also been facing losses on the transmission and distribution side due to the lack of periodic revisions of tariffs and power thefts. Consequently, state electricity boards or SEBs are debt laden and reluctant to purchase more expensive power, aggravating the situation. India has 75 thermal power projects that depend on state-owned Coal India Ltd (CIL) for supplies.

To redress the situation, the Cabinet last month decided that banks will finance 70% of the cash losses of SEBs in 2012-13 and 30% in 2013-14. It will not fund distribution companies from Haryana, Rajasthan, Uttar Pradesh and Tamil Nadu thereafter.

Restructuring loans, which means either giving SEBs more time to pay back or reducing the interest rate on loans, are not new to the power sector.

According to Geeta Chugh, S&P director of financial institution ratings, emerging Asia, 3.3 trillion of the total 45 trillion loan outstanding of the Indian banking sector has been given to the power sector, of which 600 billion has been restructured.

“About 11% of Indian banks’ loans to the power sector were restructured by fiscal 2012. We expect more restructuring to follow," S&P said.

“The proposed restructuring will convert half of the contingent liabilities of state governments to real liabilities. However, if a longer-term solution to India’s power woes is not found, the risk of another restructuring due to a continued deterioration in discom credit quality could raise future state and central government liabilities," the rating agency added.

Rajiv Vishwanathan, associate, corporate and infrastructure ratings, said restructuring loans will not improve the credit quality of distribution companies. “It will only temporarily provide liquidity to distribution companies. There will be no material impact on credit quality unless fuel supply constraints and higher fuel costs are addressed," he said in a conference call.

Takahira Ogawa, director, sovereign ratings, at S&P, said the power sector is estimated to be 1.5% of India’s gross domestic product by March 2013 and the restructuring alone would not have an impact on the sovereign rating.

“India has the lowest power tariff globally. Recently, though, some states have increasesd tariffs but it is not enough. For example, between 2005 and 2010, household expenses in India rose between 10% and 10.6% while the increase in tariffs was less than 5%," Ogawa said, adding the increase was not enough to cover operating costs.

Restructuring of loans also means the risk of rising non-performing assets from the power sector continues for commercial banks and finance companies that lend to this segment. “But the restructuring will only have a minor impact on lenders because government support will limit the impact on distribution companies," Chugh said.

“Besides the power sector, banks have significant exposure to other stressed sectors such as airlines, microfinance institutions, some aggressively-bid road projects, smaller steel and textiles companies, and the commercial real estate sector. The sustained pressure on Indian banks could lower the stand-alone credit profiles of some," S&P said.

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