A whopping Rs 53,000 crore exposure of Indian banks to the seven state electricity boards could turn into non-performing assets in the July-September quarter as the borrowers are not showing any indications that they are in a position to service the loan.
These loans were restructured in 2012 with a three year moratorium period for the principle amount of Rs 43,000 crore, ended on March 31, 2015. If the discoms fails to pay interest and/or principal by June 30, that is, 90 days from the date moratorium ended, it will turn into NPA.
The Reserve Bank of India sounded a caution to the banks about the possible fall out of discoms not able to service the loans.
“Considering the inadequate fiscal space, it is quite likely the government might not be in a position to repay the overdue principal/instalments in time…probability of slippage of these exposure into NPA is very high considering the implementation of the new regulatory norms on restructuring of loans and advances effective April 1, 2014,” the banking regulator said in the Financial Stability Report published today.
That the SEBs are not in a position to repay is evident from the fact that some of them like Rajasthan State Electricity Board which posted over rs 10,000 crore loss in 2013-14, requested for restructuring its debt once again. RBI, however, had made it clear any loan which is restructured after April 1 of this year, will attract provisioning in line with NPA, thus discouraging the lenders from debt recast.
“Banks, therefore, need to exercise adequate caution while dealing with the sector and need to continue monitoring the developments very closely,” the report said.
Banking regulator pointed out that the power sector in India has a huge potential, but it has been facing significant problems like fuel availability and linkages, project clearances, social activism. The power producers indulged in aggressive bidding in coal block auctions. The combined effect has been lower plant load factors, the report said.
The report point out that the stress in the Indian banking system continues to haunt the lenders, particularly the public sector banks. Gross NPA, as percentage of gross advances, of the banking sector gone up to 4.6% on end March as compared to 4.5%, reported six months back. Stressed advances, that is, gross NPA plus restructured advances, has gone up by 40 bps to 11.1% during the six month period. Industry continues to record the highest stressed advances ratio of 17.9% followed by services at 7.5per cent.
“Five sub-sectors, namely, mining, iron and steel, textiles, infrastructure, and aviation, which together contributed 24.8% of the total advances of banks, had a much larger share of 51.1% in the total stressed advances,” the report said. Infrastructure and iron and steel sector contributed 40% of the total stressed advances.
India is the third largest producer of steel in the world. However, the industry is beset with many problems like deceleration in domestic and global demand, depressed prices, inadequate capital investments and shortage of iron ore and lower import duty on stainless steel. These factors have created stress in the sector in general and more particular in the case of private sector companies.
According to RBI as on date, five out of the top 10 private steel producing companies are under severe stress on delayed implementation of projects due to many factors including land and environmental clearances.
The gross non-performing loans of Iron and Steel sector have grown from 4.8% in March 2013 to 7.1% in March 2015, according to finance ministry data.
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The infrastructure projects and emergence of rural projects including Bharat Nirman, Gram Sadak Yojana would help to raise domestic demand for steel. The sector holds very good long term prospects, though it is currently under stress, necessitating a close watch by lenders.
The government of India has taken many steps like increasing import duty on finished and semi-finished steel and improved logistics through use of slurry pipelines for transportation of raw materials.
The rules for External Commercial Borrowings (ECBs) have been relaxed to facilitate substitution of high cost debt. These steps should help to redress the problems faced by the industry in long term.
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