OurView | A power sector credit warning

OurView | A power sector credit warning

Warning bells are natural accompaniments of a sector that is financially unhealthy. Recently, credit rating agency Crisil sounded out a shrill warning on the possibility of large defaults in the power sector. The victims: lenders including banks and financial institutions. They reckon that as much as 55,000 crore or 12% of the loans to the sector could go under in the next two years unless state distribution utilities raise tariffs by a staggering 50% and bring down the average power supply losses from the prevailing 27-28% to as low as 15%.

As reported in Mint on Monday, the Union finance ministry has advised public sector banks not to increase their exposure to power utilities, including distribution companies, unless they pare losses and raise tariffs.

Both the steps required to bring utilities back to health —raising tariffs and reducing losses—represent uphill tasks given past performance. Tariffs in most states have not been raised in the last few years. This is largely attributable to political interference in the functioning of the regulators. This year, however, a few states have bitten the bullet; but even there, the increase in tariffs remains inadequate.

Crisil’s warning is only the tip of the iceberg. In the event of “strong medicine" not being administered, the impending crisis has the potential to snowball into a very difficult situation. This will result from a cascade of defaults by the utilities to lenders. For, the utilities would not be able to pay the largest component of their costs—bills presented by generation companies, which are adding capacity at a furious pace every year. But more than the promoters, it is the lender who is worst hit since 70% of project cost is funded by him.

This takes us to the larger question: have lenders, by and large, been prudent while approving loans? Going by Crisil’s analysis, it appears not. Dedicated power sector lenders have bet on tariff hikes to avert defaults besides a strong attempt at reduction in supply losses.

What lies behind the power sector’s large losses? Tell us at views@livemint.com