"There is an urgent need for strong policy actions to reform the power sector if we have to maintain the health of lenders, including the banks, along with PFC and REC. We estimate around Rs 56,000 crore or 12 percent of the lenders' total advances to the sector as potentially risky, if there is no meaningful progress on reforms in the next 18 months," Crisil Chief Executive Roopa Kudva told reporters here today.
Calling for a massive 50 percent spike in tariffs by state utilities, the agency said this is needed to break even the SEBs and eliminate subsidies. Such a steep increase will need political will, Crisil Ratings Director Pawan Agarwal said.
As of March 31, the total power sector advance stood at around Rs 4.8 lakh crore and it is likely to grow at 23 percent over the next two years.
"The risk to these lenders arises primarily from potential weakening in the asset quality due to escalating losses and debt levels in the distribution sector and shortage
of fuel," Kudva said. According to Crisil's estimate, the losses in the distribution mounted to Rs 35,000-40,000 crore in FY11, nearly double from the FY09 level.
Due to funding of these losses by debt, the cumulative debt of state power utilities, including distribution entities, has risen to an estimated Rs 3 lakh crore by March 31. "Further, the structural threat of fuel unavailability and pricing can potentially impair the viability of almost one-third of the 56,000 mw of thermal generation capacity under implementation today," Kudva said.
"Therefore, power sector reforms have become imperative to contain the potential asset-side risks for the lenders." "Improvement in systemic efficiency is required through reduction in distribution losses which can be achieved by involving the private sector in distribution, and broad-based political consensus is needed for implementing tariff increases..." Kudva added.
The agency opines that there is a need to hike tariffs by an average of 50 percent for state utilities to break-even, and eliminate need for subsidy.
"We believe that such hikes will have to continue over the medium-term despite political compulsions to bridge the large revenue gap. At the same time, the state support in the form of timely and increased subsidy disbursal will have to materialise to address the funding requirements," Agarwal said.
Power sector lenders at risk from delayed reforms: Crisil
(Reuters) Lenders to the power sector in India will be exposed to risk till the government ushers in sectoral reforms at a time when distribution losses and fuel shortages are on the rise, rating agency Crisil said.
Lenders Power Finance Corp (PFC), Rural Electrification Corp (REC) and several banks have together lent about 4.8 trillion rupees by March, and total advances are expected to grow 23 percent over the next two years, Crisil said on Wednesday.
Around 560 billion rupees of these lenders' exposure is potentially at risk if there is no meaningful progress on reforms in the next 18 months, it said in a statement, adding that the current ratings for PFC and REC remain strong because of government backing.
Asia's third largest economy experiences frequent power cuts and is upgrading its power infrastructure to cope with the higher demand for electricity.
But issues like poor financial health of the distribution firms, fuel shortages, sluggish pace of sectoral reforms and delay in getting clearances are threatening growth.
The sector should cut its aggregate distribution losses, which are above 25 percent now, while the political consensus should result in essential hike in electricity tariffs, Roopa Kudva, managing director and chief executive officer, said.
If the distribution firms have to break even in the future, then they need to hike tariffs by at least 50 percent from the existing level, she told reporters.
MOUNTING LOSSES
The net losses of the distribution firms, pegged at about 400 billion rupees in FY11, have been mounting at a rapid rate over the past five years, it said.
Many distribution firms are financing the gap in their revenues and the costs by debt funding, while nine states including Rajasthan, Bihar and Haryana account for 80 percent of the outstanding debt, the rating agency said.
Projects under implementation to add 19,000 megawatts are vulnerable to fuel availability and price risks, it added.
India's power sector could see tougher times ahead due to depleting inventory of key raw material coal, forcing several power stations to operate at extremely low stock levels, brokerage CLSA had said recently.
In 2011, shares of Power Finance Corp are down 53 percent, while those of Rural Electrification Corp fell 42 percent, and shares of smaller lender PTC India Financial lost 38 percent since its listing in March.
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