Supreme Court relief aside, power sector loans a lesser drag on banks

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Calling the February 12, 2018, circular issued by the Reserve Bank of India (RBI) as ultra vires or legally invalid, the Supreme Court’s (SC’s) verdict on the battle between power, sugar, and shipping sectors and the RBI finally came to a decisive conclusion. It’s being seen as a big relief since stressed borrowers need no more rush into a resolution plan with their respective bankers.

Analysts at Elara Capital say this is a much-needed breather for power generation companies affected by the RBI norms on non-performing asset (NPA) recognition. “It will help companies under stressed assets to arrive at a resolution on a bilateral basis with lenders,” analysts added.

Adani Power, GMR Energy (subsidiary of GMR Infrastructure), RattanIndia Power, and KSK Mahanadi (a subsidiary of KSK Energy Ventures) are some borrowers likely to see some relief. However, for banking stocks, it was business as usual despite a favourable verdict.

This is largely because much of the troubled power sector loans are adequately provided for, say analysts. “I see little room for write-backs, given that many public sector banks are working on net NPA ratios,” says Karthik Srinivasan, group head, financial sector ratings, ICRA.  

According to the rating agency, 92 per cent of the Rs 2-trillion loans comprised 34 borrowers from the power sector, which were classified as non-performing by banks as on March 31, 2018, and 25–40 per cent provisioning has been made on these accounts. Even if the circular was to be implemented, it wasn’t expected to have a massive implication on the asset quality of banks.

To be sure, reasonable resolution — mostly by way of finding a new buyer — has been reached on nearly eight large commissioned power plants with an operating capacity of 8,800 megawatt (Mw), that is Rs 45,000 crore of recoverable loans. These include power plants from Avantha Group, Costal Energen, and Essar Power.

In addition, analysts at ICICI Securities state that Rs 1.20 trillion of additional loans (roughly 24 Mw of capacity) to the power sector — currently non-operational — are estimated to have a recovery rate of 40–58 per cent. Therefore, extreme stress may be felt on Rs 35,000 crore of exposure to the power sector. 

While the extent of pain anticipated is expected to be less severe than what was felt in FY16-FY17, analysts believe it may be more of an ageing provisioning-related pressure from the power sector for the banks rather than pain accruing from fresh exposure. 

In fact, barring State Bank of India, which continues to have over 10 per cent exposure to the power sector loans, ICICI Bank, Axis Bank, and Bank of Baroda have brought down their exposure to the sector substantially. 

This is why brokerages estimate that the un-provided gap on the potentially stressed exposure reduces to 7-22 per cent or about 1 per cent or less of banks’ book values. 

Also, the recovery cycle should cushion asset quality. The verdict also opens up other restructuring channels of resolving bad loan issues such as the Scheme for Sustainable Structuring of Stressed Assets, and allows more flexibility for banks and borrowers to negotiate the terms of recovery.