Power sector stress may worsen banks' bad loan pain even more in Q4FY18

Implementation of resolution plan within timeframe appears difficult

After the Reserve Bank of India's (RBI) new circular on non-performing asset (NPA), the March 2018 quarter (Q4) performance of public sector banks (PSBs) and private corporate lenders (PCLs), could be disappointing in terms of asset quality and provisioning. 

The situation might turn worse because of the banks' exposure to the power sector.  Recently, State Bank of India (SBI) said this was a stressed sector for the entire banking system due to various issues related to demand, purchase agreement, coal supply, delay in tariff revision and delay in payment by distribution companies among others. The management also indicated the health of distribution companies was not well.

The sector's stress was observed from the asset quality indicators of banks in the December quarter (Q3). For SBI, 56 per cent of its total slippage in Q3 was from this sector. 

While Bank of Baroda (BoB) reported about 4 per cent NPAs from the sector, Bank of India (BOI) witnessed 15 per cent. Among private banks, Axis Bank's NPAs from the sector were quite high at 13 per cent; 25 per cent of its slippage came came from this sector. For them it is more serious, as they have major private players in its loan book.

The sector is unlikely to overcome the problems in the near term, said analysts.

The new NPA rules give banks 180 days (from the date of default) to implement resolution plans for the accounts in question, after which, the accounts will be referred to the National Company Law Tribunal. As indicated by SBI's management, implementation of resolution plan is a bit difficult for power projects. This means slippages and provisioning could be higher than expected in the next few quarters for both PSBs and PCLs. 

SBI's management said the problems are mainly in the private power sector and the bank has major exposure to the public sector. It does not expect more accounts to go bad as many of its assets are already under stress and resolution plans, on most of these, are underway. 

Investors should stay away from bank stocks (PSBs and PCLs) till there is clarity on matters such as new NPA rules and the letter of undertaking ban.