Power-sector debt recast only short-term solution: S&P

The government’s proposal to restructure debt of state-owned power distribution companies will only be a temporary relief and is unlikely to speed up capacity addition to meet snowballing demand, rating agency Standard Poor’s has said.

“We believe a sustained improvement in the credit quality of distribution companies and greater private sector participation can provide a long-term solution to the country’s power sector woes,” said a press release from Standard & Poor’s quoting credit analyst Rajiv Vishwanathan.

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According to the government’s proposal, a portion of loans to the power distribution companies will be restructured. About half of these loans will be transferred to the respective state governments.

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This could be through guarantees on bonds that the distribution companies will issue.

Several Indian companies have broken away from state-supplied electricity and now depend on their own captive power plants, which helped them ward off the adverse impact of the power outage that happened in August.

“However, we believe that such a practice reduces the competitiveness of Indian businesses and deters investments by overseas companies,” Vishwanthan said in the press release. An increase in investments to the sector is possible only with transparent tariff regulations and reliable fuel supply, Standard & Poor’s has said.

A reliable fuel supply, in turn, hinges on availability of timely clearances and a transparent framework for producing fuel, and the presence of adequate infrastructure for transporting fuel, it said.

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A report in Business Standard had earlier said more than half of the loans restructured by large public sector banks in April-June was from the power sector.

“Power sector would continue to suffer unless big-ticket reforms happen, thereby affecting the asset quality of banks,” an executive director of one of the public sector banks was quoted as saying in the report.