|Friday, 21 October 2011 00:00|
12% of all power loans by banks at risk of default
With large defaults beginning to take place in the power sector—overdues in Karnataka are R5,500 crore and R43,000 crore in Tamil Nadu—the first to get hit are the country’s banks. According to credit-rating firm Crisil, roughly R56,000 crore of loans, representing about 12% of all loans to the power sector (power sector loans, in turn, comprise about 7.8% of all bank loans, up from around 4.3% in FY08) are in danger of going bad thanks to power tariffs rising much slower than costs—while aggregate costs of power supply between 2007 and 2009 rose 16.5%, according to Standard Chartered equity research, power tariffs rose just 6.5%. Though tariffs have risen since, the backlog is huge. And it’s likely to get worse. According to Crisil, losses of power distribution firms are up from around R15,000 crore in 2006-07 to R52,000 crore in 2010-11—the 13th Finance Commission had projected that these would rise to R1,16,000 crore in 2014-15. By this period, bank lending to the power sector will be up to around R9,00,000 crore, so a lot more will be at risk.
That’s the overall picture, but it gets worse at individual bank levels. SBI has the largest exposure to sensitive sectors—where loans have a high probability of needing restructuring—R4,08,800 crore according to Standard Chartered equity research and around about 9% of this is to the power sector; in the case of Canara Bank, about 35% of all lending is to sensitive sectors and 27% of this comprises power sector loans. For the banks, this raises issues of recapitalisation; indeed, Crisil suggests specialised power sector lenders like PFC and REC will have a greater problem. The debt burden of power sector utilities, Crisil reckons, is around R3,00,000 crore.
A large part of this, of course, is due to the inadequate hike in power tariffs (despite a 23% hike in Rajasthan, a no-hike period of six years has meant arrears till FY11 were R21,350 crore), but Crisil points to other problems as well, of power plants which will get into trouble due to lack of fuel supplies. Of 56,000 MW of new power plants being set up, about a third will get affected as the plants require a large hike in tariffs on account of fuel costs but this is unlikely to happen—this includes the Anil Ambani and Ratan Tata UMPPs where the sharp hike in Indonesian coal supplies means that it will be cheaper to mothball the plants than to produce electricity. So, as India heads into a slowdown, the lower chances of tariff hikes will put more power plants at risk and make banks less willing to lend to new plants—this has implications for industrial production—and, with them, more banks and financial institutions. The politics of subsidies are coming home to roost.