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Fri, Aug 22 2014. 12 37 AM IST

Bad loans may have been understated

Bad loans could far exceed published estimates if banks exposure to completed power projects that are yet to start production is
taken into account
New Delhi: The amount of bad loans in Indias banking system may
have been understated and could far exceed published estimates if
banks exposure to completed power projects that are yet to start
production is taken into account.
Lack of fuel supplies and absence of power purchase agreements
with state-run utilities have been blamed for stranded power plants.
Some project developers may not be commissioning constructed
power plants because once they start production, they would have to
start repaying their creditors.

Lack of fuel supplies and absence of power purchase

agreements with state-run utilities have been blamed for
stranded power plants. Photo: Bloomberg

For their part, banks and financial institutions that have funded these
projects are not insisting that the developers set a date for the start
of commercial operations. In the event that the developers default,
the loans would be counted as non-performing assets (NPAs),
requiring the lenders to make additional provisions, adding to the
pile-up of bad loans and denting their profitability.

Many projects which are otherwise technically ready are not

declaring commercial operation date (COD) because of this lack of
power purchase agreement and fuel supply agreement (FSA). It is typical of loan agreements that loan servicing starts after the project
achieves COD, said Debasish Mishra , senior director of consulting at Deloitte Touche Tohmatsu India Pvt. Ltd.
Of 69,842 megawatts (MW) power projects stranded in the country at various stages of development, capacity totalling 45,634MW is stalled
because of insufficient coal supply. Construction has been completed on projects with a capacity to generate around 28,000MW, but these
havent been commissioned yet.
Forty listed Indian banks had gross NPAs of `2.52 trillion as of 30 June, up 21% from `2.08 trillion a year ago, as two years of sub-5%
economic growth, tepid consumer demand and projects stuck because of delayed government approvals and land acquisition crimped
corporate cash flows, hurting their ability to repay loans.
Banks exposure to the capital-intensive power sector is estimated at `3 trillion, more than the total amount of gross NPAs in the banking
system.
A top executive at Indias largest power sector lender said delaying commercial operations to avoid defaults was a common practice in the
power sector.
Deferring commercial operation date to postpone NPAs is an issue, this executive said on condition of anonymity. However, the issue of
fuel shortage is being addressed at the highest level in the government. The options include using imported coal, pooling of domestic coal
prices and rationalizing coal linkages as a short-term measure. These loans will not be allowed to turn into NPAs.
Of Indias installed power generation capacity of 250,257MW, around 60%, or 149,178.39MW, is coal-based. Growth in the production of
coal has been unable to match the demand for fuel in a country where the power sector consumes nearly 78% of the domestic output of the
mineral.
The fuel (coal) shortage situation plaguing the power sector raises concerns regarding asset quality issues of the banks, with an
estimated exposure of close to `3 lakh crore to the power sector, said Amol Kotwal , associate director, energy and power systems
practice for South Asia and the Middle East, at consulting firm Frost and Sullivan.

Currently about 28,000MW of coal-based power plants are...complete, (but) developers are delaying the plant commissioning since the
loan repayment kicks in from the COD, Kotwal added.
Bankers say the COD is beyond the control of project developers.
There can be multiple reasons why COD is missed or reworked. RBI (Reserve Bank of India) has given us a provision to change COD if
there is a bonafide reason for the delay, which is not in control of the developer, said a senior public sector banker on conditions of
anonymity.
While Indias power generation capacity grew by 60% over the last five years, coal production only grew by around 6%. The country mined
532 million tonnes (mt) in 2009-10, 533mt in 2010-11 and 540mt in 2011-12. Production was 557mt in 2012-13 and 564 mt in 2013-14.
The banks and financial institutions who have extended loans to the fuel-starved coal based plants are not insisting on declaration of COD
to start repayments since the developers could potentially default, Kotwal added.
This comes in the backdrop of several private project developers dressing up their accounts while approaching banks for funding and
inflating capital expenditure to increase debt value, thereby reducing their equity contribution. Also, these developers placed equipment
orders with manufacturers that quoted inflated order values and later transferred the balance back to the developers, Mint reported on 4
December 2012.
Everyone is aware of this practice. The banks are not insisting on COD as it will increase their NPAs. Then the real banking crisis will
unfold. The numbers are artificially suppressed till there is a revival in the sector, a Mumbai-based power sector analyst said on condition
of anonymity. They are hoping for a soft landing. Delaying COD adds to the project cost in the form of additional interest during
construction.
A second public sector banker said: Theoretically speaking, yes, it is possible for a developer to not announce COD, but in reality that is not
how things work.
He added: Banks are vigilant when it comes to power projects and their function. Where it is necessary, banks will not shy from tagging the
project as a non-performing asset. This person didnt want to be identified either.
A power ministry spokesperson didnt respond to emailed queries.

Piyush Goyal, Indias minister in charge of power, coal, and new and renewable energy, referred to the problems besetting the power
sector in Parliament earlier this month.
Many power plants in the country have neither coal nor a buyer for electricity, Goyal told the Rajya Sabha on 6 August. He went on to add that
NPAs of banks were increasing as a result.
The government was earlier working on providing a lifeline to 8,000MW of gas-based power projects stuck due to want of fuel that involved
repayment concessions, Mint reported on 20 January.
The proposed concessions to the developers included an extension of COD, and providing two to three years moratorium on repayment
along with the waiver of penal interest.
Vishwanath Nair in Mumb ai contrib uted to this story.