The risk of rising bad loans from the power sector persists for commercial banks and finance companies, cautioned Standard & Poor’s.
In this regard, the credit rating agency pointed out that debt restructuring alone is unlikely to sustainably improve the weak credit profiles of electricity distribution companies (discoms).
In its sector review, S&P said about 11 per cent of Indian banks’ loans to the power sector (which accounts for 7.2 per cent of total loans) were restructured by fiscal 2012.
“We expect more restructuring to follow. Indian banks do not include restructured loans as non-performing loans. We nevertheless include such loans as non-performing in our assessment,” said the agency.
According to Reserve Bank of India data, bank loans to the power sector amounted to Rs 3,44,980 crore as on July 27, 2021.
State-owned banks have a larger exposure to power utilities than their private sector counterparts.
S&P observed that the government’s proposed debt restructuring is expected to have a minor earnings impact on banks and finance companies that lend to discoms.
“Our ratings therefore factor in a minor earnings loss for the commercial banks, but this alone will not impact our ratings on the banks or Power Finance Corporation,” it said.
Credit weaknesses
In S&P’s view, the weak overall loan quality and earnings of Indian banks remain credit weaknesses.
The sustained pressure on Indian banks could lower the standalone credit profiles of some.
Besides the power sector, banks have significant exposure to other stressed sectors such as airlines, microfinance institutions, some aggressively bid road projects, smaller steel and textile companies, and the commercial real-estate sector.