June 26, 2018 Read More →

Stranded coal assets a major concern for Indian banking sector

The Economic Times:

Deep in the jungles of eastern India lies an abandoned power plant, a warning symbol for the $38 billion of additional bad loans which are about to engulf the country’s banks.

Like many of India’s power stations, the Jharkhand project had all the markings of success when a group led by State Bank of India lent about $700 million five years ago to build it. There’s abundant coal and water in the area, a rail track was set to run through the premises, and its promise of 1,080 megawatts of electricity was alluring in a country that faces persistent power shortages and blackouts.

Yet today it stands deserted and Indian banks have had to write off three quarters of their loans, after selling the operating company to a specialist in distressed debt. Haircuts of that magnitude are now expected across the whole power sector in India, according to Bank of America Merrill Lynch, suggesting local banks face a new $38 billion wave of losses. That would be more than four times the $9 billion they’ve written off from a previous tide of bad loans from India’s troubled steel sector.

“It is the largest bad-loan risk in the country,” said Vinayak Bahuguna, chief executive officer of Asset Reconstruction Co. of India Ltd., the firm which bought the Jharkhand plant from its creditors in 2015, about two years after construction stopped. “Just as the banks are beginning to put the stress on steel accounts behind them the power accounts are emerging as the new pain point.”

India’s banks, which have some of the highest stressed asset ratios globally, are under mounting pressure from regulators to clean up their books as the government attempts to revive loan growth and boost the economy. That is likely to intensify the reckoning they face from lending to India’s power sector, which is plagued by fuel shortages and difficulties negotiating long term supply contracts with the country’s debt-laden electricity distributors. The problem is especially acute for state-owned banks, which are already reeling under the weight of their problem debts. Out of 21 government-controlled lenders, accounting for more than two thirds of the total loans in India, 19 reported losses in the three months to March 31.

After taking haircuts of between 40-60 percent on their loans to troubled steel projects, the banks face a 75 percent loss ratio on their power lending, according to the Bank of America Merrill Lynch estimate.

More: Abandoned power plant a $38 billion warning sign for Indian banks

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