While the banking sector, especially public sector banks, continues to reel under high levels of non-performing assets, two government measures introduced this month to revive the road sector and power distribution companies may offer much needed relief.
The banking sector has an exposure of around Rs 5,80,000 crore (9.4 per cent of total banking credit) to the power sector and it has contributed significantly to the rise of NPAs in public sector banks.
Along with weak financials of discoms, lack of long-term power purchase agreements (PPAs) and fuel linkages as well as unviable high cost of projects has added to the distress in the sector. The government’s recently-approved Ujwal Discom Assurance Yojana (UDAY) seeks to financially turnaround state-owned distribution companies and offer a much-needed relief to banks.
As the scheme proposes that respective state governments take over 75 per cent of the discoms’ debt, a report prepared by Icra research said that if all states participate then PSBs’ reported restructured advances could come down by up to 1 per cent from the levels of 7.2 per cent as of September, 2015.
“The implementation of the scheme will also reduce vulnerability of banks’ exposure to independent power producers (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 which would lower the off-take risk for some of IPPs funded by banks,” the report said.
Similarly, for the revival of stalled projects in the road sector, the Cabinet Committee on Economic Affairs (CCEA) authorised the National Highways Authority of India (NHAI) to pay compensation to concessionaires in case of delays not attributable to them. The decision is expected to immediately benefit about 34 stuck projects.
While these steps are in the right direction, more such decisions to set such projects rolling across more sectors may not only get the banks to fund projects across sectors but will also revive the overall sentiment and thereby restart the private sector capital investment cycle.
However, the report adds that policy intervention is also required in sectors such as iron & steel, power and sugar to further reduce the stress. “Notwithstanding the reduction in fresh stressed asset formation, high exposure of banking sector to steel and power remains a credit concern. Should some of these large exposures slip in the classification, the ‘reported’ vulnerable numbers could also worsen,” the report said.