Bad loans: India’s power debacle could be 20 times the size of Enron

Bankers have yet to classify these exposures in the power sector as nonperforming.

Bankers are staring at a bigger debacle than Enron, almost 20 times bigger than the mega 2,000-megawatt mess.

According to media reports, the story of India’s power sector is far from a bed of roses. The total electricity-generation ability of the country is 344,000 megawatts, which is a 72 per cent increase over six years. Despite the built-up capacity, India remains notorious for its power cuts or outages, and is far from becoming  power surplus. 

At the start of the decade, India’s private sector coal-fired plants ran at 84 per cent capacity utilisation. However, today these plants are struggling to survive with load factors of 55 per cent. 

As a result, as much as 40,000 megawatts of capacity — equal to 20 Enron plants — has become stressed assets for the banking system.

However, the lenders have yet to classify these exposures in the power sector as nonperforming. Stressed as they are, it is not even remotely possible that the lenders can provide for these losses. 

However, with the Reserve Bank of India breathing down their neck, the banks are now thinking of creative solutions. 

According to a BS report that quotes BloombergQuint, the lending banks plan to convert debt that’s unsustainable into equity and sell those shares to a jointly-owned asset management company. The AMC will hawk its controlling stakes in power producers after a turnaround.

The report suggests that fixing the underlying profitability of the power business could be better idea. It advises the power sector to move away from long-term power purchase agreements. As is, state power companies do not want such contracts and are ready to cancel them as soon as they can find cheaper electricity in the wholesale market. 

The report quotes Hemant Kanoria, chairman of India Power Corp, as saying that the power demand and supply should move to exchanges which have open access for all bulk buyers and sellers. Notably, power trading in the country’s overall demand-supply equation has remained stagnant at about 10 per cent for years. This needs to change, he says.

The other point that merits instant attention is coal. Though India has no shortage of coal, unfortunately,Coal India, the largest miner, that fulfilled 95 per cent of its 600 million ton production target last year, has been languishing. It needs to tackle its underperforming subsidiaries on priority.

What Coal India Ltd needs to do is fix a price at which it is willing to supply to anyone who meets that price and take away the feedstock.

The report also suggests tweaking financing costs that today equal half of the total expense of putting up a power plant. For this, the report suggests, restructuring unserviceable loans into other instruments, such as preference shares that would give producers some breathing room.

Debt with annual interest rates of 16-per cent-plus is bound to eventually turn bad. Dragging borrowers to the bankruptcy tribunal is also not a solution and would be harsh on many stakeholders.

Neither is an asset management company, that may perhaps preserve employment, but hit banks harder. Also, who will operate the plants if the existing owners are ousted is a big question.

 

(Source: Business Standard, media reports)


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