Power project delays put Rs 1 lakh cr of loans at risk

Delays in implementing power projects, mainly due to fuel issues, could turn Rs 1 lakh crore of bank loans into NPAs if prompt action is not taken, according to a study by KPMG.

"Lack of financing and a poor pipeline is due to the current stalemate on various projects. Over 33 GW of projects are operating below 60 per cent plant load factor, mainly due to fuel issues. This could pose a risk to over Rs 1 lakh crore worth bank loans which could turn into NPAs (non-performing assets) if we don't take action quickly," KPMG said. 

According to the consultancy firm, 33 GW of capacity in an advanced stage of readiness is either tied up or under negotiation for supply based on competitive bidding.

The power sector is heavily indebted and has one of the largest exposures from banks. Their loans to private power companies stood at Rs 1.57 lakh crore as of FY13, compared with Rs 30,251 crore in FY09, according to KPMG.

That apart, the exposure of banks to state-run distribution companies in the form of short-term loans stands at Rs 1.9 lakh crore.

"For projects which have entered into PPAs (power purchase agreements) under existing competitive bidding guidelines, government should allow import of coal for the quantity equivalent to shortfall in domestic coal supply as per the signed fuel supply agreements (FSAs).

"These projects may turn into non-performing assets because of non-availability of fuel," KPMG said. The consultancy firm observed that quick implementation of government decisions is necessary.

"The government should formulate a guideline on how the decision in respect of select projects can be implemented quickly. A speedy implementation of this decision will go a long way in reviving sentiment and the investment cycle," the report said.

KPMG has suggested that Coal India could issue a certificate for the shortfall quantity and the cost of imported coal procured against this approved quantum can be made a pass through by the regulator based on the guideline.

According to the KPMG study, more than 30 GW of 79 GW of private thermal and hydro generation capacity planned by FY17 is waiting to be tied up under long-term power purchase agreements.

As of FY12, about 78 projects with a capacity of 103 GW were stuck for want of environmental approvals. Water approvals are pending for almost 45 projects with an aggregate capacity of 62 MW, while 80 projects with 118 MW of capacity are awaiting fuel tie-ups.

The capacity addition target for the 13th plan is 100 GW and the private sector is expected to contribute at least 64 GW, which will require equity capital of Rs 1.27 lakh crore.

"To enable strategic and other large financial investors like pension funds to view the sector favourably, the government should quickly resolve various uncertainties such as position on coal block allocation, implementation of imported coal pass-through, policy on M&A related to allocated mines and have a war-room approach to resolving issues related to some stuck up projects," it said.

The consultancy firm said that longer-term clarity on some of these issues will bring about more confidence for investors looking to acquire operational projects and running them for cash flow yields.

Further, the domestic lending community is precariously poised towards the sector due to potential NPAs on account of various projects that have been delayed or have been unable to achieve commissioning due to fuel or PPA-related issues.

"What is needed is a special dispensation liberating provisioning norms for such loans to avoid them getting classified as NPAs.

"This could be done only for those projects which are facing loan restructuring on account of uncontrollable factors such as coal supply related issues and issues related to environment or forest clearances. This will help unlock the financing logjam and enable a positive investment cycle to commence," KPMG said.

It said the government should enable takeout financing for banks by strengthening institutions such as India Infrastructure Finance Company Ltd.

"This will help partially address the sectoral exposure caps that banks would otherwise be constrained by," it said.