PTC India Financial Services Ltd slumped 8% on Tuesday after the company reported a sharp rise in non-performing loans for the June quarter. Three loan accounts turned bad during the quarter and, consequently, net non-performing assets (NPAs) jumped six times from a year ago. They have doubled from the March quarter.

The results show continuing financial stress in the power sector. Last week two power financing companies—Rural Electrification Corp. Ltd (REC) and Power Finance Corp. Ltd (PFC)—reported elevated levels of non-performing loans. REC’s net NPAs tripled from a year ago. They’re up 10% from end-March. Though PFC’s net NPAs fell slightly from March, they have doubled from the year ago quarter.

Compounding the problem is the slowing loan book. As a result of subdued investments in the power sector, companies are seeing limited lending opportunities, and slowing disbursements and loan book growth. The PFC and REC loan book increased just 1-2%. From March they have fallen 5-6%. This drove up non-performing loans as a percentage of assets.

In comparison, PTC Financial Services reported strong growth in its loan book (up 38% last quarter). But the company has seen interest reversal due to a sharp rise in non-performing loans during the quarter, ICICI Securities Ltd said in a note. As a result, interest spread and net interest margins fell 1.8-1.9 percentage points, leading to a miss on earnings.

Overall, these three companies which lend money to the power sector reported a deterioration in bad loans. That points to the dismal state of the underlying sector and the situation can remain difficult for some time.

According to Religare Capital Markets Ltd, REC’s restructured assets rose on a sequential basis. Stressed asset ratio rose to 13.3% from 11.8% in the March quarter. Similarly, Edelweiss Securities Ltd notes that a significant portion of PFC’s gross non-performing loans relates to gas-based and non-commissioned projects.

Even if a portion of these assets turn bad, they can drive up NPA ratios as loan book growth is expected to be weighed down by loss of business from the implementation of the revival scheme for state electricity boards.

PTC Financial Services is benefiting from its exposure to the renewable energy sector, which is seeing good demand. But that competitive advantage will wane if the company does not arrest the deterioration in asset quality.

These concerns are captured by current valuations—both PFC and REC are trading below their book value per share. Stability in asset quality or signs of a recovery in the loan book could lead to a change.

The writer does not own shares in the above-mentioned companies.

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