The cascading impact of the Supreme Court’s impending verdict on how to treat the mines “illegally” allocated since 1993 is slated to hit the banking sector hard, considering that bank credit to the tune of over Rs 100,000 crore in just the power sector rides on the fate of the coal blocks. Or about a fourth of the total bank credit that has been extended to the power sector in the last 13 years.
According to RBI estimates, an amount of Rs 403,822 crore was extended by scheduled commercial banks to the power sector between April 2000 and March 2013. Of this, if power projects with coal linkages from Coal India Ltd and those awarded to state-owned generation firms such as NTPC Ltd, Damodar Valley Corp and various SEBs are excluded, the projects that were allocated blocks would add up to a cumulative capacity of about 30,000 MW, according to a senior official with the Power Ministry.
At the conservative estimate of Rs 5 crore per MW (including investments in the mine), investments of about Rs 150,000 crore in just the power sector are now under cloud. Assuming a 70:30 debt:equity ratio followed in the power sector, bank credit to the tune of Rs 105,000 crore hangs in the balance. If the credit extended by banks and financial institutions to other sectors, including the steel and cement industries, is taken into account, the amount could exceed this estimate.
After the verdict, on the bourses, the bank stocks that took the biggest hit were Indian Bank, Andhra Bank and Union Bank, all of which tanked over 4 per cent. Power sector lenders PFC and REC were also badly hit, with both stocks down 4.6 per cent by close of trade on Monday.
Anticipating cancellation of a number of blocks, which is clearly the most expected course of action by the apex court, the government is learnt to have directed scheduled commercial banks to assess the exact quantum of exposure to the block-linked projects, especially in the power sector.
Meanwhile, an official involved in the exercise said the government’s argument before the apex court on September 1 would focus on the two overarching principles by which the coal blocks, if cancelled en masse, can be reallocated through competitive bidding — either under the principle of revenue optimisation or optimising gains to the consumer.
Under the first, the blocks would be awarded to those bidding the highest amount, which would, in turn, increase the electricity tariffs for consumers. The second option would call for the mines being offered to developers of projects that bid the lowest tariffs from their power plants or undertake to offer the cheapest end products such as steel or cement, in lieu of gaining access to a block.
In a bid to avoid widespread distress, the government is likely to plead that cancellations should be on a case-by-case basis, or on the basis of iregularities that have surfaced in specific screening committee meetings, rather than en masse.