Power and airlines to remain bugbear for banks

Though various policy decisions have been taken by the government to provide relief to ailing state-owned power distribution companies and airlines, the Reserve Bank of India (RBI) is not enthused. It remains sceptical about these, saying exposure to these sectors could take a toll on banks.

RBI, in the Financial Stability Report released on Thursday, stated the power and aviation sectors were likely to continue facing funding constraints. These could also be affected by policy uncertainties, which could pose challenges to the asset quality of credit to these sectors.

The government plans to restructure the large number of loans given to power distribution companies. Also, it is yet to come up with a financial package for Air India. The Centre for Asia-Pacific Aviation has pegged the combined losses of Indian air carriers in 2012-13 at Rs 7,150 crore.

“Their viability and ability to pay on time would remain a concern for us,” said the chairman and managing director of a public sector bank.

In the report, RBI also flagged risks faced by banks due to their exposure to the power sector. The risks primarily arise from the rising losses and debts of state electricity boards and the shortage of fuel for power generation.

Potential pressures on asset quality have intensified, with restructuring bank credit to the power sector registering a sharp rise. RBI said the asset quality of banks’ credit to the airlines industry had come under stress in recent times.

This was primarily driven by the performance of some specific airline companies.

Significant concentration was seen in the distribution of credit to the airline sector, as ten banks accounted for about 86 per cent of the total bank credit to this sector.

As of March 31, nearly three-quarters of advances by banks that had exposures of more than Rs 1,000 crore to the airline industry were either impaired or restructured. Public sector banks accounted for the majority of these exposures, RBI added.