Banks’ Exposure To Power Sector
Vidrum / 20 Feb 2012
The concern about the power sector and the companies that operate in this space can primarily be classified into two sections. One is to do with the shortage of coal which is the input for the production of power and the other is that companies in the sector want the tariff prices to be hiked which would further provide relief on their margin front. On February 15, 2012 some relief came in the case of the former segment. The prime minister (PM) indicated that Coal India should sign fuel supply agreements (FSAs) with those power companies that have long-term purchase agreements and which have already commissioned their power plants or will be commissioning them on or before December 31, 2011.
The execution of the same though looks difficult as even at present Coal India is facing a production deficit. Coal India for the nine months ended December 2011 has reported 2.74 per cent decline in production. Assuming that coal is supplied to the power companies, this would help turn the tables. Even though the tariff rates will remain at the current level, the companies will be able to achieve a higher turnover level which will ultimately benefit the bottomline.
This all will also provide relief to the banks which have exposure to the power sector. The banks are not aggressive on lending funds to the power sector on account of many reasons of which one of the major reason is the shortage of coal. They are ready to give loans for working capital but are not open to the idea of lending for new capacity additions. The restructuring of some companies may further get postponed if the companies start performing well.
Earlier in December 2011, the Shunglu Committee had recommended the creation of special purpose vehicles (SPVs) to be held by the Reserve Bank of India (RBI) which will take loans from banks that have exposure to state electricity boards (SEBs) in case they are not able to make the repayment. This move also would favour the banks. However, the final verdict on the same it still pending.
The following is a list of the three major banks having exposure to the power sector:
| Exposure To Power Sector As On FY11 | ||
|---|---|---|
| Name Of The Bank | Amout (Rs / Crore) | % Of Total Advances |
| State Bank Group | 37,038.86 | 2.51 |
| ICICI Bank | 37,233 | 5.90 |
| HDFC Bank | 4,304.25 | 2.14 |
The move will clearly not have an impact in the short run. But one may hope that the policy-paralysed government may respond sooner on the tariff issue which will further benefit the power companies. If the tariffs are raised then the riskier power sector would become neutral for the banks to lend. Banks having power exposure will closely watch out for any such development as they are facing issues on their asset quality front.
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