Rating agency, Crisil, on Wednesday estimated that loans accounting to Rs 56,000 crore to the power sector might come under risk.
This lender exposure, which accounts to 12 per cent of the total power sector advances of Rs 4.8 lakh crore, can come under potential risk if no meaningful reforms take place in the sector in the next 18 months.
Escalating losses and debt in the power distribution sector, and fuel shortages (both coal and gas) in the generation sector, have resulted in the potential weakening of the asset quality in the sector. State distribution and generation utilities form a major part of the risky loan portfolio. As a remedy, the agency suggested reforms in the sector like timely increase in rates to match the increased fuel costs, state support to their respective electricity boards (SEBs), timely payment of subsidies, and increased private participation in distribution.
“The SEBs need to increase rates by 50 per cent just to break-even,” said Roopa Kudva, managing director of Crisil. The agency estimates losses in the distribution segment for 2010-11 at Rs 35,000-40,000 crore. The losses may be higher if any of their large receivables need write-offs. Nearly half of the 57 distribution companies covered in the study, had negative networth by the end of the last financial year.
A part of these reforms are already taking shape in the sector. This year, eight SEBs have raised their rates. Lenders have started restricting loans to fund state utilities’ losses.
“The extent and effectiveness of reforms in the sector remains a key monitorable over the next 18 months,” said Pawan Agrawal, director of Crisil Ratings.