KPMG India report paints bleak power scenario, but bankers optimistic
Mumbai: A shortage of fuel has stranded more than 33,000 megawatts (MW) of power generation in India, and if the situation does not improve fast, Indian banks could be staring at a bad debt of more than Rs.1 trillion, according to a white paper by a global consulting firm, even as bankers said things have improved substantially in the sector and bad debts are not likely to deteriorate in the near future.
Bad debt as a percentage of total advances in the power sector stands at 0.57%, according to Reserve Bank of India (RBI) data. However, including restructured advances, the ratio is 19.40% at the end of fiscal ended March against 13.30% a year ago. It was as low as 4.11% in the fiscal to March 2011. This includes advances to state electricity distribution companies (discoms), which together accounted for Rs.1.9 trillion of restructured advances.
“A big concern today is a lack of financing available for new projects,” said the report by KPMG India, titled Recharging the Power Sector. The 13th Five-Year Plan requires Rs.1.27 trillion of private sector equity and the project pipeline looks weak, the report said.
A bank chairman with a big public sector bank contested the claim.
“The amount of pending projects are huge and drawdowns have not happened against them. There is actually no need immediately to draw a fresh power project but it will be good if the government just pushes the pending projects faster,” said the banker who did not want to be named. “Once the existing projects fire up, the power scene in the country will change rapidly. Government banks have been financing these projects and will continue to do so if the projects turn viable again.”
“There are stranded power assets and at the same time in many regions consumers are facing power shortages,” the KPMG India report said, adding the distribution sector financial losses stood at Rs.67,000 crore in fiscal 2012, while bank exposure to discoms in the form of short-term loans stands at Rs.1.9 trillion.
The debt to equity ratio of private power generation firms shot up to 2.64 in fiscal 2013 from 0.91 in fiscal 1995. The cost of power deficit in the form of additional cost of diesel back-up generation is Rs. 43,800 crore a year.
“Commissioned but stranded power capacity stands at more than 33GW (due to lack of coal and gas) which will result in non-performing assets (NPAs) with investments of over Rs.1 trillion,” the report said. 1GW, or gigawatts, is equivalent to 1,000MW.
The Electricity Act of 2003 opened up the power generation sector to private firms. It allowed companies with funds, land, fuel and environmental clearances to set up plants anywhere in the country. Since 2003, according to Planning Commission data, private sector firms added around 24,000MW capacity. However, today these private sector companies are facing twofold challenges—availability of fuel and lack of demand from distribution utilities, which are still mostly controlled by the state governments.
Most of these plants are operating only at 60% of their capacity due to non-availability of fuel, both coal and gas, according to the KPMG India report.
Besides this, nearly 33,000MW of projects which are to come up by March 2017 don’t have any long-term power purchase agreements with state distribution utilities because of which they can also become NPAs. These generators don’t have bankable agreements because the procurement process of state distribution utilities is extremely slow.
Bankers and power sector analysts do not see the situation as dire as painted by the consulting firm.
“Most of the problems of power sector are because of over enthusiasm of the private sector players to anyhow bag the contracts for supply of power from distribution utilities,” said V.P. Raja, former chairman of Maharashtra Electricity Regulatory Commission. “In an attempt to quote lowest tariff to get the contract, they did not bother to double-check whether fuel is really available and at what price.”
Power projects are being cleared fast by the cabinet committee on investments and things are looking up, according to S.L. Bansal, chairman of Oriental Bank of Commerce. There could be delay in revenue generation, but in a power-deficit country like India, projects will eventually pick up. “There were problems because discoms were not paying the power generation companies. Now that their loans have been recast and they are paying the companies, things are improving. Of course, there will be cost overruns, but in most cases the firms have a cost pass-through clause in the agreement,” said Bansal. “Of course, in power agreements where there is no pass-through clause (or the cost of power is pre-fixed), the promoters will be in deep problem.”
“We are nowhere near a situation that oversaturation in power has happened. There is still heavy demand for power and tariffs are getting revised. There is no dearth of coal in the country and power can now be generated with imported coal as well,” Mundra said. “I don’t see why power should continue to remain a big NPA problem for banks in the future.”
The long-term forecast for power demand is good, Raja said. “I believe these are short-term problems,” he said. “Sixty five percent of our population is below 25 and we need to find them jobs and if we need to create jobs for them, we need huge power generation capacities; so long-term forecast for power demand looks good.”