BackThe looming risks for banks from power sector
The banking system runs the risk of a sharp surge in bad loans in the power sector until electricity availability problems are fixed and tariffs are hiked
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The banking system runs the risk of a sharp surge in bad loans and restructured loans in the power sector until electricity availability problems are fixed and tariff hikes implemented.
Subsidy booked for state electricity boards (SEBs) is estimated to have increased to ₹ 49,700 crore in the current year, a nine-year high, compared with the estimate of ₹ 42,400 crore of the subsidy received (see chart by Kotak Institutional Equities Research in a 28 February note). Distribution companies are buying less power than required due to the weak financial condition of SEBs and higher subsidy burden, despite demand for power. “Even though we do not expect SEBs to default, their inability (unwillingness) to raise power tariffs results in low plant load factors (PLFs) for the generation companies, which raises the risk of NPLs (non-performing loans) for generation entities," says the report.
With the government allocating more money to states, they will decide on SEB recapitalization. The limited control of the central government in the power sector restricts its ability to address the problem. “Each state is responsible for fixing its own power tariffs and more often than not, does not align the tariff to market levels due to social reasons. Despite a few round of tariff increases over the past 2-3 years, under-recoveries (or losses) on per unit basis still remain quite high in several states," added the report.
While there is a glimmer of hope for coal-based power plants because of the coal block auctions, gas-based plants are still in limbo.
The government has allocated only around ₹ 7,990 crore for recapitalizing public sector banks, against expectations of ₹ 13,000-14,000 crore for the coming fiscal year.
The smaller banks which have less capital and are more exposed to the power sector will obviously be at more risk, unless issues surrounding fuel availability for the coal based power plants are resolved.
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