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ing reductions in AT&C losses; inability to meet operating and financial parameters set down by regulators; and also, delays in takeover of the debt by respective state governments. As a result, the accumulated losses and debt levels for the affected utilities continued to mount even after the restructuring. This also resulted in a tightening of lending by the banking sector, which adversely impacted their ability to off-take power from the generation segment. Overall, ICRA estimates the accumulated losses for state owned discoms as on March 2015 at around Rs. 4 trillion, which has largely been debt funded. A large chunk of these losses and debts are accounted by discoms in 6 states (Uttar Pradesh, Rajasthan, Tamil Nadu, Haryana, Andhra Pradesh and Telengana). • As the scheme is optional, ICRA believes that the timely implementation of the same by State Governments remains extremely critical for ensuring the credit quality ofv not only the distribution companies, but also for the generation industry by enabling the discoms to offtake power as well as make timely payments. This would however require apart from the takeover of debt also a) continued focus by the utilities to improve the distribution loss levels and keep cost structures and loss levels in line with regulatory targets for tariff setting; b) adequate and timely tariff revision by SERCs as per directions of the Apellate Tribunal of Electricity (ATE) including periodic passthrough of fuel cost fluctuations and c) timely & adequate subsidy releases by State Governments. Implications for Banking Sector • As on September 2015, Indian banks exposure to the power sector was around Rs 5.8 trillion (9.4% of banks’ domestic credit); of this around Rs 1.6-1.8 trillion is estimated to be towards state power discoms (around 30% of banks’ exposure to power sector) and balance is largely to independent power producers (IPPs). Out of banks’ exposure to power generation sector around 17% was already classified as stressed advances. • Reduction in vulnerability: The UDAY package to restructure the outstanding debt of discoms holds the potential to reduce the vulnerability of banks’ exposure to the power sector, if States accept UDAY scheme. The banking system’s exposure to state discoms will come down following the conversion of 75% of their exposure to state government bonds in staggered manner (50% in 2015-16 and 25% in 2016-17). Of the banks’ exposure to state discoms, part is already classified as standard restructured (restructured under Financial Restructuring Package or FRP). On implementation of UDAY scheme these exposures will come out of restructured classification and as result PSBs’ reported restructured advances could come down by 0.8-1.0% from the levels of 7.5% as of June 2015. • The implementation of scheme will also reduce vulnerability of banks’ exposure to IPPs to some extent as with improvement in financial health of state discoms, counter party risk for these borrowers will come down. Additionally, with improvement in financial health of discoms some pick up in signing of PPAs by discoms could happen that would lower the off-take risk for some of IPPs funded by banks. Impact on profitability: While the scheme expected to lower the vulnerability of banks’ loan book, it will have negative impact on banks’ operating profitability; on a industry basis, if all states participate in the scheme banks NIMs could decline by 7-12 bps, partly offset by the reversal of provision for standard restructured advances of 3-4 bps2, impact operating profitability by 4-8 bps • Negative impact on NIMs, partly offset by reversal of provision for restructured advances: As States take over 75% of discoms debt, and issue state government bonds to same extent to the lender, yields on the banks’ exposure will come down to 8-9%, as coupons on state government bonds is expected to be significantly lower than the original contracted rate of as high as 14-15%. Also the lending rates on balance 25% debt which is retained on the banks balance sheet, are required to get reset at not more than 10 bps over the bank’s base rate, which currently ranges from 9.3-9.7%. In ICRA’s estimate if banks continue to hold these assets on their balance sheet their NIMs could come down by 5-30 bps depending on the share of state discoms loans in total credit book of respective bank (refer chart 1 for bank-wise position on exposure to discoms in relation to total credit book). Banks’ with higher exposure to state discoms (CBI, P&SB, Vijaya, OBC and UCO) will be more affected vs. banks’ with lower exposure to state discoms (SBI, BOB). However since banks credit exposure is getting converted to more liquid state government bonds, banks could consider selling these exposures to protect their NIMs. • Reversal of provisions created for restructured advances: As 75% of these borrowings will be converted to state government bonds and post conversion these will come out from restructured classification thus provision of 5% created for these loans will also be reverse. • Negative for credit growth: This however would lead to a shrinkage in banks credit book by 1-7% (depending on the share of state discoms loans in total credit book) over the period of FY16-FY17, leading to further pressures on growth, which has moderated to single digit in FY15 and in current fiscal. POWER SECTOR 76 energetica INDIA · ENE | FEB16


energetica-india-55
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