Which banks need to worry the most if the power sector defaults?

A struggling power sector is threatening to take down the lenders who funneled money into what was once considered to be the next ‘big thing’ in India’s investment ideas.

Judging by the estimated level of losses that the power distribution sector is racking up and the way projects are taking their own time to be commissioned on the generation side, it’s very likely that banks funding power sector could be heading for some major trouble. On Monday, an  Economic Times article said State Bank of India and ICICI Bank could be some of the names looking at restructuring loans given to the power sector.

That, in itself, is not new: the restructuring of power loans has been talked about for quite some time now. In September, a report by Macquarie, wryly entitled “Gloom doom kaboom,” pointed out  that most experts were grossly underestimating how sharply bad assets and restructuring would push up the credit costs in the next financial year (ending March 2013).

The increase in credit costs could be as much as 20-30 bps (100bps=1 percentage point), according to the brokerage.

Those higher costs could lead companies – and banks – to restructure some of their loans. Up to 3.5 percent of advances could be restructured, Macquarie forecasted, predominantly led by the power sector. In the sector itself, up to 40 percent of advances could be restructured.

Power sector advances constitute nearly 7.3 percent of total outstanding credit for banks. Of this, nearly 30-40 percent is accounted for by state electricity boards (SEBs) and face a much greater likelihood of being restructured if things get any worse. Still, the possibility of these loans turning into bad assets is very slim because the government is very likely to bail out the sector, just as it did in 2001, if the financial crisis deepens further.

So what banks face the greatest risk because of the growing financial woes of the power sector?

Canara Bank has the highest exposure to power, with 13.3 percent of its assets exposed to the sector, while Kotak Mahindra Bank is the least troubled with almost negligible exposure to power, according to Macquarie. Over all, public-sector banks are likely to face more trouble than private-sector banks (see table).

The one silver lining in this case is that there has been a slowdown in disbursal of fresh credit to the power sector recently. Analysts said that while loans have been sanctioned to the power sector, disbursals have been very slow because projects have been slow to take off the ground. In fact, Deepak Parekh, chairman of IDFC, told NDTV Profit recently that only around 10-15 percent of loans sanctioned in the past year have actually been disbursed.

To some extent, that takes care of any additional risk posed by the power sector for bank assets. A recent CLSA report said the ratio of risk-weighted assets (riskier assets)  to total assets had come down for the entire banking sector from the highs of 2008, except in the case of Axis Bank. That means the banking sector is now better placed to face a slowdown or restructuring of loans, if needed, than they were at the peak of the previous economic crisis.



Mechanical engineer with experience in Power Plant maintenance , operation and auditing for ISI marked products. MBA in Power Management from National Power Training Institute, Faridabad. Working as Consultant for Bridge to India Pvt. Ltd. Expertise in: 1) Power sector regulations 2) Financial Modelling 3) Project Development solar PV plants 4) Strategic consulting 5) Report writing

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