Banks wary of lending to loss-making power sector. And this time you can't blame them

It’s all building up to a spectacular implosion of the power sector. According to a report in The Economic Times today, Allahabad Bank has decided to halt lending to power companies.

It's not the first one to take a dim view of the sector. A few days earlier, Punjab National Bank announced it has restructured Rs 2,500 crore of loans in the past quarter, of which Rs 1,800 crore was lent to Tamil Nadu State Electricity Board. ICICI Bank has also not ruled out restructuring some loans to the sector when required.

M Narendra, chairman and managing director of Indian Overseas Bank has also said that some state electricity boards (SEBs) had asked for a restructuring of their loans. The bank, which has lent about Rs 9,000 crore to the sector, is exploring ways of how this can be done, he added.

State Bank of India and ICICI Bank have the highest exposure to the power sector; both of them have lent almost Rs 30,000 crore each to companies.

Clearly, the financial situation of power companies, especially in the distribution sector, has become untenable.Reuters

Clearly, everyone is getting jittery about the future of power companies, especially SEBs, whose losses are increasing by the day.

Banks are getting especially wary about SEBs in Tamil Nadu, Rajasthan, Uttar Pradesh, Bihar, Haryana, Madhya Pradesh and Punjab, which, according to ratings agency Crisil are the most vulnerable to the ongoing power sector crisis. Indeed, why would anyone want to lend to a sector that is practically swimming in losses running into lakhs of crores?

Recently, another ratings agency, Icra downgraded state-run Power Finance Corporation and Rural Electrification Corporation; both lend funds exclusively to the power sector, saying that it was “unable to ascertain the outlook, in the absence of clarity on critical measures” to improve the situation for both SEBs and independent power producers (IPPs).

Something needs to be done — now

Clearly, the financial situation of power companies, especially in the distribution sector, has become untenable. Due to political considerations the cost of purchasing power has risen in recent years, while consumer tariffs have not been at par.

Subsidies to agricultural and domestic consumers at the cost of  industrial consumers is another problem. Add to that transmission and distribution losses and you have a perfect recipe for disaster.

Instead of introducing long-term reforms the sector so desperately needs, the government is resorting to temporary short-fixes. In 2001, the government wrote off Rs 41,400 crore worth of losses to "rescue" the power sector. Now, reports have said the government is planning to do something similar again.

That, of course, will do nothing to prevent another crisis from coming along in the next few years. As Firstpost reported earlier, accumulated losses of the sector as on 31 March this year totalled a staggering Rs 2,10,000 crore.

Given the mess it is in, frankly, it’s difficult to blame banks for getting cold feet over lending to the sector.

The severe cash crunch could force governments to let distribution companies raise tariffs and take steps to help the generation side as well. If these steps are  not taken, it will be a case of lights out for the sector.

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