Need to monitor the assest quality of power sector says RBI
Moneylife Digital Team 23 December 2011

SEBs witnessed losses due to lack of periodic tariff revision and high T&D losses which are in excess of 30%. The rising losses and debt level in SEBs are biggest risk  to banks credit exposure, the central bank said

With incremental credit to the power and telecom sector outpacing the aggregate growth of the banking sector credit, the Reserve Bank of India (RBI) has called for “careful monitoring of assets quality of these segments.” It also remains cautious of the deteriorating assest quality of the banking sector.
The apex bank, in its Financial Stability Report (FSR), said that, “The risk that banks face on account of their exposure to power sector is due to two reasons:  rising losses and debt levels in SEBs (State Electricity Boards) and shortage of fuel availability for power sector.”

SEBs witnessed losses due to lack of periodic tariff revision and high T&D losses which are in excess of 30%. Despite the SEBs being bifurcated into three entities, their ownership, maintenance, financial well being and cash flow continue to remain dependent on each other.

Even the Shunglu Committee, constituted in July 2010 to look into the financial problems of SEBs, has recommended setting up of a special purpose vehicle (SPV), in which RBI will hold 76% while Power Finance Corp (PFC) and Rural Electrification Corp Ltd (REC) will own the balance in equal proportion, to restructure the debt of SEBs.

Power sector, the report says is also facing shortage of coal supply. It adds that, “Against this backdrop, there is anecdotal evidence of many lenders being cautious in extending loan to the sector.

The report revealed that out of the total impaired and restructured accounts in the banking sector, power and telecom sector, together, rose to 8.5% for June 2011, from 5% in March 2011. In terms of infrastructure credit, these sectors accounted for 77%.
According to the FSR, sectors like retail, real estate and infrastructure together contributed to 85% of the gross non-performing assets (NPA) at the end of September 2011. Overall, the growth of NPAs stood at 30.5% and slippages at 92.8% for the same period, outnumbering the 19.2% credit growth.

The report says that, “Higher provisioning requirements, consequent to higher non-performing assets and higher interest expenses have put pressure on banks’ profitability.”

Commenting on the banking sector, RBI said, “With further slowdown in credit cycle expected on the back of higher interest rate environment and slowing economy, deteriorating assest quality will emerge as a challenge for the banking sector.”  However, despite the rising NPAs the report sounded positive the outlook of the banking sector compared to other developed countries.
“The turmoil in the euro zone has fanned fears of deleveraging by the European banks. Though Indian banks are not expected to have any direct impact on account of their negligible exposure to the troubled zone, indirect impact on account of funding pressure could be seen,”  the FSR added.

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