An area of darkness

THE INDIAN POWER sector has been in trouble for so long now, nobody even talks of it anymore. Inadequate tariff revisions, high aggregate technical losses, and fuel shortages have all combined to create a sector that’s on the brink of a catastrophe.

Industry, of course, is among the hardest hit, but the surprise victims are the lenders. Specifically, Power Finance Corporation (PFC), ranked 83 on the Fortune India 500 and Rural Electrification Corporation (REC), ranked 95. Both were set up to lend to power companies. Their combined advances are at Rs 1.8 lakh crore (as on March 2011) after having grown at 24.4% over the past five years.

“These two have large exposures to state distribution companies, many of which are incurring substantial losses,” says Arvind Mahajan, partner and head, energy, natural resources and global infrastructure, at KPMG, a consultancy. The losses of state-held power units alone amounted to between Rs 35,000 crore and Rs 40,000 crore in 2010-11.

Crisil, a research and ratings agency, estimates that the total borrowings of the power sector come to around Rs 6.5 lakh crore as on March 31.

Of course, these are not the only institutions funding the sector. Banks and other infrastructure lenders have an estimated Rs 4.8 lakh crore invested. This is likely to grow at the rate of 23% annually due to a strong pipeline of undisbursed sanctions.

However, banks are now jittery. Punjab National Bank has restructured Rs 2,500 crore of loans to power companies, and Allahabad Bank has frozen all lending to them. But banks have a diversified portfolio, which makes them less vulnerable to shocks from any one industry, unlike PFC and REC. Crisil says the state power utilities account for some 65% of PFC’s loans, and 83% of REC’s loans. What are the chances that they will get their money back?

While both companies refused to comment, analysts say it’s going to be tough. “These entities are run by the government and, hence, may not default, but significant delays are inevitable,” says Mahajan. Government guarantees might not mean much, given that the state’s capacity to subsidise the power sector has gone down thanks to a slowing economy.

However, some say this is painting an unnecessarily grim picture. “This stress is only short-term,” says Sambitosh Mohapatra, executive director, PricewaterhouseCoopers India. “In the next two or three years, most woes of the sector will be dealt with.” He adds that regulators are already taking steps to tackle tariff issues and transmission and distribution issues.