As power projects trip, banks like SBI and ICICI may have to look at recast of loans

S0urce : ANITA BHOIR & RUCHIRA ROY,ET:1 OCT, 2011, 02.32AM IST,
State Bank of India and ICICI Bank are among the dozen lenders staring at the possibility of restructuring loans to the crisis-hit power sector that has been hobbled by state electricity board defaults and delays in new projects. 

A sector that only a few years ago was a gold mine of opportunities for investors and lenders, is turning out to be an unwanted child with both private equity investors and lenders. So far this fiscal, private equity investment in the sector has halved while lending has slowed to a trickle due to a number of reasons.

At least for the record, no power producer has defaulted so far, but the state of affairs has begun to ring alarm bells with some estimates showing that losses on loans could squeeze the banking system and revive memories of what happened when the textile industry went through a similar crisis in the 1990s.

For some, it is like revisiting the nightmare of Dabhol Power after its parent Enron went bankrupt in 2001. The RBI is inspecting banks to assess the potential damage. "So far, there have been no delinquencies as the projects are in the implementation stage, and if there are any stress, banks will restructure the accounts at the individual level,'' said Romesh Sobti, chief executive at IndusInd Bank that has loaned Rs 895 crore, or 8.9% of its total loans, to power sector.

"State electricity boards have always been in bad financial health, however, they carry a sovereign guarantee, hence the chances of default are very less.'' ICICI leads the list of banks with the highest exposure to the power sector.

It has given Rs 37,233 crore, or 5.9% of its total book, followed by State Bank with Rs 36,915 crore, or 2.5% of its total book. Axis Bank ranks third with Rs 17,110.60 crore, or 5.7%, annual reports of all the banks show. State Bank and ICICI Bank officials declined to comment, citing silent period ahead of their quarterly earnings.

"Our power sector book continues to perform satisfactorily,'' said an Axis Bank spokesman. "The projects are progressing as per schedule and most of them are expected to become operational over the next 2-3 years. With the longterm outlook positive, the portfolio is expected to perform satisfactorily....''

Lack of major reforms in the power sector is hurting the economics of the industry. In most cases, the state-owned electricity companies are monopolies in distribution, and sell power at heavily subsidised rate to consumers, especially farmers.

Years of uneconomical operations have pushed many, such as Rajasthan and Tamil Nadu's distribution companies, into losses, followed by default to power producers. The state-owned power distribution company in Tamil Nadu has seen its losses rise to Rs 38,000 crore in fiscal 2011 from Rs 4,900 crore in 2006. Its debt is up at Rs 40,300 crore from Rs 9,300 crore over the same period.

"Structural reforms are required in the transmission and distribution," said RK Bansal, executive director, IDBI Bank Ltd. "State regulators will have to make sure that they increase tariffs as fast as they can. The delay is largely in new power projects.

In one case, there has been a delay in implementation which can be handled.'' Scores of power projects, including JSW Energy and Reliance Power, are also facing delays due to nonavailability of fuel, such as coal and gas, and land acquisition. The government's flip-flop in mining, and environmental policies have also hurt.

Some, such as Tata Power and Adani Power, are importing coal, but even that is becoming unviable given the surge in coal prices. These issues may manifest themselves as losses to banks. "Our supervisors are assessing the situation in each bank and also the entire banking sector,'' Reserve Bank of India Governor Duvvuri Subbarao told ET in an interview earlier this month.