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In need of a bailout
With several power utilities running up prohibitive losses and power tariffs remaining static for years on end, the much touted growth story for the power sector looks like tripping up.
Issue Date - 24/11/2011
The red flags are up for the power sector, which was once considered to be the next ‘big thing’ in India’s growth and investment story. But in the face of mounting losses by already debt-ridden state electricity distribution companies, existing and future loans to the power sector have become a cause of deep concern for banks and state lenders such as REC, PFC and others. Lenders such as Power Finance Corp (PFC), Rural Electrification Corp (REC) and several banks have together lent about Rs.4.8 trillion to the sector by March 2011 and total advances are expected to grow 23% over the next two years. Moreover, around Rs.560 billion of these lenders’ exposure is potentially at risk if there is no meaningful progress on power reforms in the next 18 months. And going by the way the power distribution sector is racking up losses, funding for the sector looks headed for real trouble.

Losses for state electricity distributors, which depend on state support and borrowings from financial institutions to meet revenue shortfalls, doubled in the two years since April 2008 to $12.9 billion, according to a Power Finance Corp report. The net losses of the power distribution firms, which have been widening over the past five years, was pegged at about Rs.400 billion in FY11. As a result, many distribution firms are financing the gap in their revenues and costs by debt funding. Nine states including Rajasthan, Bihar and Haryana account for 80% of the outstanding debt (see chart). But mounting losses at state electricity boards (SEBs) and delays in the execution of new power plants are making servicing of loans and interest payment difficult. SEBs are on a brink of bankruptcy as they are saddled with losses running into millions of rupees on account of power theft during transmission and distribution, billing inefficiencies, and, more importantly, because they have to buy expensive power to tide over short-term deficits. To add to the woes of distribution companies, power subsidy requirement by distribution utilities has increased both in absolute and percentage terms over the last few years, which means that the ratio of average revenue realisation (ARR) to average cost of supply (ACS) and the gap between ARR and ACS has deteriorated. From a credit perspective, timely disbursement of subsidy to distribution companies remains a critical factor, given that any significant delay in subsidy payments by the State governments can impact the cash flows of the state-owned power utilities.

Under the circumstances, it’s no surprise that some of the state electricity boards are already asking for loan restructuring by extending the repayment period. Loan advances to power sector constitute nearly 7.3% of total outstanding credit for banks. Of this, nearly 30-40% is accounted for by state electricity boards (SEBs) and face a much greater likelihood of being restructured if things get any worse. According to brokerage firm Macquarie, up to 40% of advances to the power sector could be restructured. Canara Bank has the highest exposure to power, with 13.3% of its assets exposed to the sector, while Kotak Mahindra Bank is the least troubled with almost negligible exposure to power. India’s top two lenders, State Bank of India and ICICI Bank, are among those having high exposure to the power sector, with more than 300 billion rupees of loans each. According to Chairman and Managing Director of Punjab National Bank K.R. Kamath, “Wherever we had issues on state electricity board short-term loans we have restructured and converted them into long-term loans repayable over a period of time.” In fact, PNB has restructured loans worth Rs 1.7 billion given to Tamil Nadu state electricity board in the second quarter. A similar predicament is being faced by Indian Overseas Bank, which has lent more than 91 billion rupees ($1.8 billion) to the power sector. “Some of the state electricity boards are asking for loan restructuring. We’re seeing how that can be worked out,” says Chairman and Managing Director M. Narendra. According to the Reserve Bank of India, bank loans outstanding to the power sector as on September 2011 was Rs 3,007 billion. Banks exposure to power sector at the end of August 2011 accounted for 7.9% of total bank credit. The maximum limit is 8.3%, which leaves almost no room for further funding.

With the aim of improving the commercial viability of the SEBs, reforms have been one of the key thrust areas for India’s power sector. The sector is gearing to cut its aggregate distribution losses, which are above 25% now to around 10%, while efforts are being made to forge political consensus on hiking electricity tariffs. Some SEBs have failed to revise tariffs for years, adding to their losses. According to industry experts, if power distribution firms have to break even in the future, then they need to hike tariffs by at least 50% from the existing level. At the same time, the government is trying to facilitate funding to the power sector by relaxing exposure norms for banks, PFC and REC and by increasing the exposure limit to single borrowers to 30% of their capital reserves from the current 25%.

Despite the growth opportunities for the power sector, the industry’s inability to cope with the challenges and without a way out of its current funding scarcity, India’s energy deficit looks almost certain to widen in the years ahead. The sector, which is struggling with funding shortfalls, will need an additional Rs. 18 trillion investment if the government intends to come good on its objective of adding 100,000MW during the 12th Five-Year Plan (2012-17). However, the 11th Five-Year Plan (2007-12) had set a target of adding 78,577MW of power generation capacity, requiring around Rs. 10.60 trillion of investment. So far, the country has been able to add only over 23,000 MW of electricity and there is funding shortfall of Rs. 4.2 trillion. If these developments are an indicator to the future, then the road ahead for the power sector looks fraught with all kinds of bumps and speed breakers. Unless, of course, the government and the industry get their act together in real good time.

karan arora           

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