Approximately 9% of the total financial exposure to the power sector — or around $10-12 billion worth of loans — could be in trouble if the Supreme Court cancels all coal block allocations since 1993 that it declared illegal on Monday.
The credit relates to around 18 GW of power capacity, 60% of the 30 GW that is based on captive coal.
According to an analysis by Credit Suisse, although the apex court is yet to decide whether the coal blocks will be deallocated, the fact that it has described the allocations as illegal makes the risks “quite high for these projects”.
The report notes that given the uncertainties related to linkages for18 gigawatts of coal-based projects, a large part of banks’ exposure to the private sector will be “under a cloud”.
Analysts point out that even as clarity is awaited from the Supreme Court, which will resume hearings in the case from September 1, any halt in production, even temporary, would compel producers of steel and power to purchase coal at e-auctions or import the fuel. Given the difference in prices, this would crimp their cash flows and possibly delay repayments to lenders.
Captive coal is currently mined at R 600-800 per tonne while e-auctions fetch prices of R2,200 a tonne, and the price of imported coal could go up to as high as R3,500 per tonne.
Captive coal production is mostly concentrated with steel manufacturers, which get roughly 12 million tonnes per annum (mtpa), while power have access to 26 mtpa.
The total exposure of banks to the power sector, as on June 27, 2014, was Rs 5.08 lakh crore, a 14.4% increase over June 2013, though a good part of this money has been lent to state electricity boards. Banks have also lent Rs 2.65 lakh crore to the steel sector, Reserve Bank of India (RBI) data show.
For instance, State Bank of India’s exposure to the power sector is just over Rs 90,000 crore but the bank hasn’t lent much to projects that are based on captive coal.“The mining has not even started in some of the mines,” a senior SBI official told FE.
In its ruling on Monday, the Supreme Court observed that allocations to state mineral development corporations (SMDC) in 2001 were not legal. Some of these state PSUs had formed joint ventures with private power producers and handed over the coal mining operations. If these mines stop producing it could hurt several power plants that are either operational or about to be commissioned.