Resolving power discom woes a priority to cut NPA risk for banks

In June, apex bank had warned that Rs 53,000 cr of discom loans recast by PSBs carried a higher risk of becoming NPAs

A step to protect the asset quality of banks, Reserve Bank of India chief Raghuram Rajan has said the stress from financially troubled state-owned power distribution companies (discoms) needed to be addressed on priority.

In June, the central bank's financial stability report had warned that the Rs 53,000 crore of discom loans recast by public sector banks carried a higher risk of becoming non-performing.

On Tuesday, in his post-policy review interaction with the media, Rajan said after the global overcapacity in metals, the power sector was a second source of stress for banks.

“Central to the woes in the sector are the distribution companies. If these get resolved in more permanent ways, that would alleviate some sources of stress in the sector. RBI’s focus is on how to resolve the distribution company stress in a proper way, so the power purchases go on in a more effective way,” he said.

RBI’s policy statement noted final demand for power remained strong and the recent pick-up in generation due to easing of bottlenecks in coal supply. But, this was being partly negated by structural problems on clogging of transmission grids and the dire financial state of discoms.

For restructured loans, the moratorium period for repayment of the principal amount, totalling Rs 43,000 crore, ended in March 2015. The probability of slippage of this exposure into non-performing assets is very high due to the new rules (effective April 1) on restructuring of loans, RBI said.

Rating agency CRISIL in a recent report on the health of power utilities said Telangana, Madhya Pradesh and Tamil Nadu had weaker discoms, with high gaps/unit. However, they are backed by strong state governments, which can lend support through equity or loan infusion. On the other hand, the Andhra Pradesh, Bihar, Jharkhand, Haryana, Punjab, Rajasthan and Uttar Pradesh governments have a comparably lower ability to support their discoms. These are estimated to account for half the total discom borrowings. For Haryana, Rajasthan and UP, the financial restructuring package on these would end soon, raising the pressure, it said.