Mumbai: The banking sector, which is already reeling under a mammoth pile of bad loans, is looking at potential dud assets of $38 billion from the power sector, as $53 billion of the $178 billion bank loans to the sector are already stressed, said a report.

“Of the $178 billion (around Rs11.7 trillion) of debt of the power sector, $53 billion (around Rs3.5 trillion) are already under stress (primarily to the generation sector) and of this, as much as $38 billion (around Rs2.5 trillion) have the potential of being written-off as bad loans," the Bank of America-Merrill Lynch (BofA-ML) report said on Wednesday.

The report is based on the fact that as much as 71 gigawatt (GW) of private sector coal-based projects are facing bankruptcy filings at various NCLTs, implying probable resolution from June 2019 and it expects an average 75% write-off in these loans. Of the $ 178 billion loan, the distribution companies have $65 billion, generation companies have $77 billion, and transmission firms have a debt burden of $36 billion, says the report penned by BofA-ML research analysts Amish Shah and Sriharsh Singh.

Of the $53 billion of stressed loans, as much as $50 billion are to the generation sector alone, says the report, adding loans to the distribution sector, which were earlier stressed, are now better off given quasi-state guarantees and restructuring under the government’s Ujwal Discom Assurance Yojana (Uday) scheme.

Of this $178 billion debt mountain, banks have the largest at 53% of the total loans, followed by non-banking finance companies (NBFCs) at 35% and the balance from the states. About 43% of loans are extended to the power generation sector, followed by distribution at 37% and transmission at 20%, the report said.

It can be noted that the power, steel, roads, mining and telecom sectors are the most stressed accounts for banks whose bad loan burden has crossed Rs11 trillion or 10.5% of the system as of December 2017. The report further notes that the $116 billion national power utilities lose around $9 billion annually but can turnaround without hiking consumer tariffs and also continue to offer the present average subsidy of 2% if the many of its cost-inefficiencies are resolved.

It also states that tariff hikes are not the way forward for the sector to turnaround as already tariffs for industrial and commercial consumers, who constitute 37% of demand, are very high compared to its regional peers. But the report is critical of the reforms introduced to address inefficiencies saying they expect limited progress.

As per the report, of the $116 billion expenditure incurred by power distributors annually (as of March 2016—the latest available data for national distributors), 54% is related to operations and maintenance/other expenses across the value chain (administration costs, employee expenses, taxes, marginal profits etc), fuel comprises only 20% of the cost, borrowing cost is only 19% and freight charges are at a low 7%. And surprisingly, subsidies to farmers constitute only 2% of the cost of the states on a national level barring for Punjab and Haryana where it is 7-8%.

Farmers are the second biggest consumer segment for the discoms with 22% of total power consumption as agricultural power tariff is only Rs1.7 per kilowatt hour (kWh) against the cost of Rs6.3 per kWh. Though some states provide free power to farmers, the expenses are paid by the respective states to distributors from their annual budgets. “Our analysis suggests, while at the national level, power subsidy comprises 2% of all states’ annual expenditure, but for Punjab and Haryana, it 7-8%," says the report.

The sector has a $5 billion import bill as one-sixth of the fuel needs are met by imports. For power generation companies, this comprises $24 billion in annual costs, while coal accounts for 87% of this cost. Besides, $4 billion of such fuel is imported which is around 5% the country’s non-oil and non-gold imports), comprising $3 billion of coal and $1 billion of LNG.