Power Sector Companies may default of Loans; India Power Sector Low Tariffs, Scarce Fuel and Land Issue Problems may lead to loan defaults of Power Companies

LOW TARIFFS, SCARCE FUEL and LAND ISSUES TAKE TOLL

Embattled Power Cos may Default on 1.35 lakhs cr of Loans

Indian power companies have slowed down project implementation and are unable to operate new plants at targeted capacity, which may lead to defaults of over . 135,000 crore from the sector that is battling low tariffs, scarce fuel and land acquisition problems. 

The banking sector’s exposure to power projects, according to Reserve Bank of India data, is a staggering . 292,342 crore, about the same as India’s total corporate tax collection last year. Half the loans sanctioned to existing power plants remain unutilised and fund flow to new projects has almost stopped. The power sector accounts for 7.8% of total non-food credit exposure, up from 4.8% at the end of March 2009.

Banks are being cautious in disbursing sanctioned loans to projects as power companies have not been able to make progress on project sites due to non-availability of coal, environment clearances and problems of land acquisition.

Lenders, including state-run Power Finance Corp and Rural Electrification Corp, have told companies that they will not disburse funds unless a project has firm fuel-supply contract. A few months ago, the lenders wanted companies to arrange fuel within a year of disbursement.

A survey by the Association of Power Producers and Mercados Energy Markets showed projects with a total capacity of 38,748 mw are impacted due to unavailability of coal. Industry officials say that assuming a capital cost of . 5 crore per mw, the aggregate default to the banking sector could be . 135,618 crore, or 46% of the current banking exposure to the sector.

The survey shows that about 21,300 mw of electricity generating assets, including Lanco’s Anpara C, Adani’s Mundra, Tiroda and Kawai, are either running at lesser capacities or are idle due to lack of sufficient coal or regulatory clearances to mine. Investments may be Staggered.

“Work on the projects was started after receiving firm supply commitments from Coal India. Now, as Coal India is assuring supply of only 50% of the requirement, banks and developers are wary about their investments. It is also likely that the developers of these plants stagger investments and plants may not come up,” Association of Power Producers Director General Ashok Khurana said.

The future of another 14,200 mw of power projects proposed to be run on imported coal looks bleak as supplying nations have decided to charge higher price. The impacted projects include Essar’s Salaya, Tata Power’s Mundra and Reliance Power’s Krishnapatnam.

“The early signs of financial stress due to these concerns are evident from the fact that up to 50% of sanctioned power sector loans are lying around without drawdowns. The strain and slippages in funds lent to the infrastructure sector has been caused by project execution milestones being missed due to problems in fuel linkages and clearances. This has resulted in tighter norms for disbursement and banks are getting more cautious on incremental exposure in view of these uncertainties,” the survey said.

The situation becomes worse as major Indian banks are close to hitting their group exposure limits for power companies fixed by the Reserve Bank of India. On an average, banks can lend 20% of their net worth to infrastructure projects.

Many private companies are also turning to Chinese equipment that come with cheaper lines of credit. Interest rates in the country have increased to 13-14% from 9% in the past two years, while Chinese loans are said to be at least 2-3 percentage points cheaper.

Power developers have demanded a revision in tariffs of imported coal-based projects as the new law in Indonesia — the largest coal supplier — makes imports costlier.

Indonesia has said it would not allow coal exporting companies to sell the fuel at prices below notified rates after September 23. Australia issued a draft mining law 10 days ago to impose a levy on coal and iron ore projects from next year.

A senior power ministry official said existing contracts could only be revised by state governments purchasing power from the imported coal-based projects. “The agreements have been signed between state governments and the power project developers,” he said.

Source: ET