In principle, borrowing money to run and grow one´s business, makes sound business sense. Both banks and borrowers are happy in this age-old arrangement, well, most of the times. There are the odd occasions when Murphy´s Law comes into force, and whatever could go wrong, goes wrong. The environment goes hostile, regulatory changes happen, structural shifts take place, volatile elements such as forex rates, interest rates, demand supply balance, etc., vary wildly, and as a result of all that, risk frameworks fail. This exotic combination of unfavourable factors compromises debt servicing ability, and gives rise to unsustainable debt positions.
The total debt extended by banks to industries stands at around Rs 26 trillion. The power sector hogs an impressive 20 per cent share of this outstanding debt, on an approximate basis. Given that we in India have a low per capita consumption of electricity, and that quite a few of our countrymen are yet to become a consumer of power, it is only normal that our power sector would like to grow faster in keeping with the demands of the nation, and therefore it is not surprising that this sector bears a large component of the bank loans extended to industries. Obviously, under these circumstances, the credit quality of the power sector defines the asset quality of the banking sector, to a considerable extent. Again, in the normal course of things, all this would be signs of good business and good health.
However, in the last five years, our power sector has been plagued by several disadvantages which have pulled the industry down. Starting from a slackening of growth in the economy with resultant softening of energy demand, to structural issues around fuel supply chains and pricing, to unforeseen regulatory shifts in India and abroad, to even debilitating weaknesses of distribution entities in terms of their ability to buy and pay for power at market driven prices - all these issues have come together to haunt the power companies. The Plant Load Factor (which is the power sector´s term to represent capacity utilisations) has hit a historic low. In some extreme cases, this has even impaired their capacity to service their debts on a sustainable basis.
The good news is that things seem to be turning around now. On the fuel front, prices have fallen, domestic coal availability has vastly increased, and the government is working on an auction model for imported gas supplies to stranded gas-based capacities. Transmission capacities have grown, and this has helped allay evacuation concerns. Lastly, the intervention made by the government to restructure the discoms, which we fondly call ´UDAY´, seems to be a potential game-changer in transforming the health of our distribution entities. All in all, the power sector in general may expect better days ahead, and this is well and truly reflected in the renewed interest of global investors in this sector.
Let us hope for a new sunrise, or if I may be allowed to say, a new UDAY, both for our power companies and our banks!