RBI sees bad loans of Rs5 lakh crore from power, realty and infra
Moneylife Digital Team 14 November 2011

RBI fears stressed assets of Rs5 lakh crore from power, real estate and infrastructure sectors on higher interest rates and slow growth. The rise in NPA may reflect very badly on bank’s book

The Reserve Bank of India (RBI) fears that bank loans of around Rs5 lakh crore (Rs5 trillion) may come under stress due to rising interest rates and slow revenue growth. The sectors affected most by the bad loans would be power, aviation, real estate and roads. Experts believe that if economic activity does not pick up, the rising non-performing assets (NPAs) from these sectors will have a severe impact on the books of Indian banks.

Subir Gokarn, deputy governor of the RBI, on 8th November, had said that the NPAs of banks are not posing any threat to the banking system. However, sources confirm that the RBI is expecting huge bad debts of Rs5 lakh crore from various sectors.

According to the sources, the central bank has arrived at the amount considering possible NPAs from the state electricity boards (SEBs), real estate due to slow demand, particularly from the metros, and de-growth in aviation sector on higher cost of turbine fuel and excess capacity.

During the second quarter of the current fiscal, bad loans of listed banks in the country rose by 33% to Rs1 lakh crore due to rising interest rate and sluggish growth.

Power sector is under financial strain due to increasing losses by SEBs and non-execution of new projects because of the regulatory hurdle. Last year, power distribution companies, lost about Rs40,000 crore due to subsidised tariffs. Currently, experts say, banks are hesitating to extend fresh loans to these companies. Allahabad Bank, a public sector lender, has already frozen lending to power sector companies.

Macquarie Economic Research, in a report, noted that losses by SEBs would result in huge state fiscal deficit: “The last audited, published review of SEB finances in FY10 reflected an average loss of Rs.0.86/kWh in India, the FY11 annual SEB losses (without accounting for subsidy) have been reported by media to be around Rs700 billion+ (US$15bn, 0.9% of GDP). Incorporating the SEBs losses (subsidy received basis) would result in the state fiscal deficit widening from 2.3% of GDP to 3.0% of GDP in FY12,” Macquarie said.

According to rating agency, CRISIL, advances of around Rs56,000 crore, or 12%, which is the exposure of domestic financial institutions’ to the power sector, may turn into to bad loans if power distribution reforms are not taken soon. CRISIL said the sector also suffers from huge aggregate technical and commercial losses apart from the wide gap between average cost of power supply and actual realization.

Things are not rosy for the Indian aviation sector, as well. Kingfisher Airlines is not the only one under mounting debts. The entire sector is hit by the rising aviation turbine fuel cost, which is the major operational cost and over-capacity created due to more leased aircrafts by the companies. At the same time the yield per seat has fallen.

According to the estimates by Centre for Asia Pacific Aviation (CAPA), an aviation industry consultant, during FY12, Indian aviation sector is likely to make a net loss of around Rs12,500 crore. Usually, the airlines cover the losses through additional funding from banks in the form of loans as working capital. Experts believe that in case there is a default, it directly affect the bank’s balance sheet.

Same goes with Indian real estate sector. According to RBI, Indian developers’ outstanding credit rose 23% to $24.4 billion or about Rs1.22 lakh crore at the end of June 2011 from a year ago period. However, with surging input costs and slumped sales, realtors are finding it tough to repay their dues. High inflation scenario has also made taking loans expensive. DLF, India’s biggest realtor, saw its debt going up by almost Rs1,000 crore during July-September 2011 to Rs22,519 crore. Mumbai-based realtor, HDIL has incurred a debt of Rs4,000 crore as of September end.

A series of scams hit the union government since last year, which has taken toll on the infrastructure projects such as construction of highways. Non-execution of these projects has put in financial strains on the infrastructure sector that may lead to possible default on loan repayment. According to a media report, the 20 biggest loans given by banks are related with infrastructure sector. Experts say that the rising input cost and interest rate is also escalating the cost of the projects.

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