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Mumbai: Indian banks, struggling to cope with a surge in bad debt in a slowing economy, could have more trouble headed their way if repayments on loans for building power plants, roads and other infrastructure go the same way starting April because many of the projects are stuck in red tape or have been delayed on account of other reasons.

Many of these projects will hit their project completion deadlines from the next fiscal year onwards, which is when they’ll need to start making the loan repayments. While outstanding bank loans to infrastructure firms rose to 6.9 trillion as of 31 December from 5.96 trillion a year ago, growth of such credit slowed to 16% in the 12 months ended December from 20.5%.

Infrastructure is the sector to which Indian banks have the greatest exposure. In the debt recast list, the amount related to infrastructure is 19,737 crore, the most after 47,138 crore to the iron and steel sector. Those infrastructure loans account for 9.35% of the total in the so-called corporate debt restructuring channel, where banks typically stretch repayment periods and slash interest rates to aid the troubled borrower.

Unless the government and the regulators step in to resolve issues such as the lack of adequate fuel supply for power projects and regulatory hurdles in the way of infrastructure projects, many of these companies will find it difficult to service their bank loans, analysts and sector experts said.

Any defaults will add to the woes of the country’s 72 trillion banking system, already reeling under mounting bad loans that are eating into earnings. Gross non-performing assets (NPAs) of Indian banks shot up by 43.1% to 1.79 trillion at the end of December from 1.25 trillion a year ago as companies came under pressure due to slowing economic growth, estimated at as low as 5% in the current year compared with 6.2% last year.

When a loan turns bad, banks need to set aside more money in the form of provisions, which, in turn, impacts profitability.

“As of now, most NPAs of banks have come from sectors such as textiles and metals, and not much from the infrastructure sector," said Vaibhav Agarwal, vice-president (research) at Angel Broking Ltd, a Mumbai-based brokerage firm. “But bad loans may start emerging from infrastructure loans in the next financial year for many banks, which have significant infrastructure exposure."

Among the banks that have significant exposure to the power and infrastructure sectors are Central Bank of India (34% of its loans), IDBI Bank Ltd (32.9%), UCO Bank (32.3%), Canara Bank (22.4%) and Andhra Bank (24.5%), according to Agarwal.

At many banks, infrastructure loans are yet to show up as NPAs on the books as many of them are currently being restructured to avoid this. That may only delay the inevitable unless structural issues, mainly the availability of fuel, tariff revisions in the power sector and delays in obtaining requisite clearances for road projects, are addressed, analysts said.

Banks typically don’t classify loans given to infrastructure projects as NPAs while the project is under construction. But if the projects remain unviable after their completion, banks will have to restructure the loans or classify them as substandard in the event of a default, analysts said.

Within infrastructure, banks have the most exposure to power companies— 3.8 trillion as of December end.

“There is an urgent need to bring regulatory clarity on how tariffs will be adjusted to reflect the inevitable fuel price variations, whether imported fuel or supplemental fuel to meet shortfall in FSA (fuel supply agreement)," said S. Kameswara Rao, executive director (energy division) at PricewaterhouseCoopers. “If this issue is not addressed, many existing assets will go deeper into red, and new projects are already hesitant to proceed with development."

Fuel price increases can spell trouble for the firms.

“For a coal-based project, typically 60% of the cost is on account of fuel including coal transportation, and even marginal variations in the coal price such as 5-7% that is not covered by tariffs can entirely wipe out that year’s profit and start impacting cash flows, forcing them into loan restructuring," Rao said.

Banks are currently in the process of implementing a bailout package for ailing state electricity boards that the government announced in September last year. The state government-owned electricity distribution companies, which owe 2 trillion to banks and financial institutions, had found it difficult to raise working capital.

This has added to the overall restructuring burden of the banking system, which has already recast loans worth about 4 trillion across sectors on a cumulative basis. Analysts expect at least 25-30% of such loans to turn bad unless economic activity revives.

Typically, banks lend to power producers based on the initial plan of project execution and the availability of coal for the project at multiple phases. But due to the scarcity of coal in the local market, most companies have been forced to rely on costly imports. Even though international coal prices have dropped in recent months, a weakened rupee has meant companies haven’t benefited from this.

Reflecting the growing stress in the sector, India Ratings and Research Pvt. Ltd, formerly Fitch India, has maintained a negative outlook for infrastructure projects and coal-based plants for 2013 and said the credit profiles of several power projects—particularly those that are coal based—will remain under pressure. “India Ratings-rated coal-based projects are exposed to completion, fuel supply and off-take risks, among others. Nearly three-fifths of the rated projects can be bracketed as being vulnerable to high levels of risk," the agency said.

According to estimates, coal demand in India is expected to grow from 649 million tonnes per annum (mtpa) now to 730 mtpa in 2016-17, making the country heavily dependent on imported coal, given that the projected local availability is only 550 mtpa.

Coal India Ltd, the state-run company with a monopoly on supply of the commodity in the country, has signed FSAs with power projects. But “impediments such as the lack of sufficiently harsh penal deterrents for non-fulfilment of supply obligations and the propensity to offer inferior-grade coal to adhere to volume commitments preclude projects from operating at forecast plant load factors", India Ratings said in its outlook.

Companies building roads have been hit by delays in clearances from the environment ministry, resulting in cash flows being stressed.

“If things do not improve by March, many loans given by state-run banks to road projects could come under stress. Many projects have backed out after commencing due to absence of necessary clearances," said Abishek Kothari, a research analyst at Violet Arch Securities Ltd.

After power, banks have the most exposure to roads—total loans outstanding were at 1.26 trillion in December.

India Ratings expects construction delays to continue in 2013. “At least 50% of the highway projects in the rated portfolio scheduled for completion in 2013 have already reported three-six months delays due to land/right of way not being handed over by the concession grantor," the rating agency said.

Bankers are worried and hope the government will step in to remove the roadblocks.

“There is stress developing in the infrastructure sector on account of various structural bottlenecks and project clearance issues,"said K.R. Kamath, chairman and managing director of Punjab National Bank (PNB). “One needs to look at the issues deeper to evaluate solutions to these problems. The government has initiated steps to solve these problems."

Kamath said the banking system has to support infrastructure projects without which development will suffer. PNB has a combined exposure of 54,578 crore to power and infrastructure sectors, or 20% of its total loan book.

Andhra Bank has restructured infrastructure loans under stress, said chairman and managing director B.A. Prabhakar. Recovery will depend on how soon these companies get back to normal. “We have restructured most part of the loans given to infrastructure companies, wherever they were facing clearance issues. If the restructuring works successfully, there will be no issues. If it doesn’t, there will be stress coming from such loans," he said.

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