The Indian Banks Association is planning to seek the Centre’s immediate intervention over state governments scrapping or looking to renegotiate power purchase agreements (PPAs) with thermal and renewable energy producers, several bank executives said. They warn that this will worsen an already precarious bad-loan situation.
State governments such as those of Uttar Pradesh, Andhra Pradesh, Karnataka and Madhya Pradesh are scrapping or seeking fresh pacts on the ground that the tariffs contracted earlier are very high.
“Given the present stress and progressively increasing NPAs (nonperforming assets) in the sector, coupled with the fact that it is happening in more than one state, the ministry of finance needs to intervene immediately to stem this worrying trend which has serious implications for prospective investments and earlier contracted debts,” according to a draft of the note that the IBA is said to be planning to send to the finance ministry.
The Uttar Pradesh government recently cancelled PPAs with several suppliers to reduce distribution company costs. Banks fear other states could take a cue from this. Andhra Pradesh is already renegotiating wind PPA tariffs downward, while Karnataka has cancelled wind PPAs signed earlier. With power sector stress already contributing to nearly 17% of the overall debt of banks, the fear is that the bulk of the next round of slippages will emanate from this sector. That’s at a time government and the Reserve Bank of India are making renewed efforts to resolve banks’ bad loans, regarded as a significant economic risk.
“This is a worrying trend that will have serious negative consequences. If a contract solemnly entered into with a quasi-sovereign entity has no sanctity and can willfully and unilaterally be breached, no one would want to invest in the sector,” according to the IBA draft, which ET has seen.
“The loans taken by these developers to set up the capacity that turns infructuous after cancellation of PPAs would turn bad, adding to the non-performing burden of the banks.”
The Madhya Pradesh government recently took away the ‘must-run’ status of renewable and co-generation projects, a cornerstone of the renewable energy capacity addition programme. This means that such utilities can continue to produce power even if it’s not needed, making for better viability. Lenders have expressed apprehension that taking away the status will jeopardise earlier investments and put on hold planned investments in the renewable sector. There is further fear that distribution utilities will renegotiate a contract each time prices fall.
Bankers who did not want to be identified said a similar action by other states could lead to non-performing assets of more than Rs 1-2 lakh crore for the banking system. Bank NPAs amounted to Rs 7 lakh crore as of March 2017.
“If these PPAs are cancelled, the power projects will become unviable. These projects are currently servicing debt but loans will become unserviceable if prices are renegotiated downwards,” said a banker. “This quarter we have already seen fresh slippages from our power portfolio. Going forward we expect to see fresh bad loan recognition from this segment across all banks.”
Axis Bank has already warned of power sector debt slippages. The sector accounts for close to 70% of its outstanding watch list of Rs 9,485 crore. Power generation and distribution accounts for Rs 25,600 crore or 5.2% of its fund based and non-fund based outstanding loans. ICICI BankBSE -1.22 % has the highest exposure to the sector in absolute terms, close to Rs 45,000 crore, or 4.8% of its loan book.
It recorded an addition of Rs 1,420 crore to its watch list from a power account classified below investment grade in the June quarter.