IBA may Seek Cen­tre’s Help Over PPA Changes

New power pur­chase pacts will worsen banks’ bad-loan sit­u­a­tion, say of­fi­cials

The Economic Times - - Companies & Economy - Saloni.Shukla@ times­group.com DebtDb Load

Mum­bai: The In­dian Banks As­so­ci­a­tion (IBA) is plan­ning to seek the Cen­tre’s im­me­di­ate in­ter­ven­tion over state gov­ern­ments scrap­ping or look­ing to rene­go­ti­ate power pur­chase agree­ments (PPAs) with ther­mal and re­new­able en­ergy pro­duc­ers, sev­eral bank ex­ec­u­tives said. They warn that this will worsen an al­ready pre­car­i­ous bad-loan sit­u­a­tion. State gov­ern­ments such as those of Ut­tar Pradesh, Andhra Pradesh, Kar­nataka and Mad­hya Pradesh are scrap­ping or seek­ing fresh pacts on the ground that the tar­iffs con­tracted ear­lier are very high.

“Given the present stress and pro­gres­sively in­creas­ing NPAs (non-per­form­ing as­sets) in the sec­tor, cou­pled with the fact that it is hap­pen­ing in more than one state, the min­istry of fi­nance ne- eds to in­ter­vene im­me­di­ately to stem this wor­ry­ing trend which has se­ri­ous im­pli­ca­tions for prospec­tive in­vest­ments and ear­lier con­tracted debts,” ac­cord­ing to a draft of the note that the IBA is said to be plan­ning to send to the fi­nance min­istry. The Ut­tar Pradesh gov­ern­ment re­cently can­celled power pur­chase agree­ments with sev­eral sup­pli­ers to re­duce dis­tri­bu­tion com­pany costs. Banks fear other states could take a cue from this. Andhra Pradesh is al­ready rene­go­ti­at­ing wind PPA tar­iffs down­ward, while Kar­nataka has can­celled wind PPAs signed ear­lier. With power sec­tor stress al­ready con­tribut­ing to nearly 17% of the over­all debt of banks, the fear is that the bulk of the next round of slip­pages will em­anate from this sec­tor. That’s at a time when the gov­ern­ment and the Re­serve Bank of In­dia are mak­ing re­newed ef­forts to re­solve banks’ bad loans, re­garded as a sig­nif­i­cant eco­nomic risk.

“This is a wor­ry­ing trend that will have se­ri­ous neg­a­tive con­se­quences. If a con­tract solemnly en­tered into with a quasi-sov­er­eign en­tity has no sanc­tity and can will­fully and uni­lat­er­ally be breached, no one would want to in­vest in the sec­tor,” ac­cord­ing to the IBA draft, which ET has seen.

“The loans taken by these de­vel­op­ers to set up the ca­pac­ity that turns in­fruc­tu­ous af­ter can­cel­la­tion of PPAs would turn bad, adding to the non-per­form­ing bur­den of the banks.” The Mad­hya Pradesh gov­ern­ment re­cently took away the ‘must-run’ sta­tus of re­new­able and co-gen­er­a­tion projects, a cor­ner­stone of the re­new­able en­ergy ca­pac­ity ad­di­tion pro­gramme.

This means that such util­i­ties can con­tinue to pro­duce power even if it’s not needed, mak­ing for bet­ter vi­a­bil­ity.

Lenders have ex­pressed ap­pre­hen­sion that tak­ing away the sta­tus will jeop­ar­dise ear­lier in­vest­ments and put on hold planned in­vest­ments in the re­new­able sec­tor.

There is fur­ther fear that dis­tri­bu­tion util­i­ties will rene­go­ti­ate a con­tract each time prices fall. Bankers who did not want to be iden­ti­fied said a sim­i­lar ac­tion by other states could lead to addi- tional non-per­form­ing as­sets of more than ₹ 1-2 lakh crore for the bank­ing sys­tem. Bank NPAs amounted to ₹ 7 lakh crore as of March 2017.

“If these PPAs are can­celled, the power projects will be­come un­vi­able. These projects are cur­rently ser­vic­ing debt but loans will be­come un­ser­vice­able if prices are rene­go­ti­ated down­wards,” said a banker. “This quar­ter we have al­ready seen fresh slip­pages from our power port­fo­lio. Going for­ward we ex­pect to see fresh bad loan recog­ni­tion from this seg­ment across all banks.” Axis Bank has al­ready warned of power sec­tor debt slip­pages.

The sec­tor ac­counts for close to 70% of its out­stand­ing watch list of ₹ 9,485 crore. Power gen­er­a­tion and dis­tri­bu­tion ac­counts for ₹ 25,600 crore or 5.2% of its fund based and non-fund based out­stand­ing loans.

ICICI Bank has the high­est ex­po­sure to the sec­tor in ab­so­lute terms, close to ₹ 45,000 crore, or 4.8% of its loan book. It recorded an ad­di­tion of ₹ 1,420 crore to its watch list from a power ac­count clas­si­fied be­low in­vest­ment grade in the June quar­ter.

With this slip­page, the to­tal out­stand­ing ex­po­sure to the power sec­tor in the watch list stands at Rs 7,076 crore, or 35%, the high­est for any in­dus­try.

The stress in the power sec­tor was also re­flected in the June quar­ter num­bers of mid-sized pri­vate sec­tor lender Yes Bank. While the bank man­aged to lower its power and elec­tric­ity ex­po­sure to 10.6% in June from 11.3% in March and only 2% of its to­tal ex­po­sure is non-op­er­a­tional, it has in­di­cated that the stress in the sec­tor is high and it will con­tinue to ad­just risk in the port­fo­lio by steps such as sell­ing down loans.

State govts of UP, AP, Kar­nataka and MP seek­ing fresh pacts on the ground that the tar­iffs con­tracted ear­lier are very high

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