New energy firms & telcos stare at default, NPA fear grips bankshttps://indianexpress.com/article/business/new-energy-firms-telcos-stare-at-default-npa-fear-grips-banks-discoms-central-electricity-authority-6093593/

New energy firms & telcos stare at default, NPA fear grips banks

In all, over 15 discoms have fallen back on their payment obligations against electricity supplied by solar and wind energy developers — the only bright spark in an otherwise sluggish electricity sector.

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The power sector accounts for almost half the credit to the infrastructure sector, with the telecom sector coming in second.  (File Photo)

There is renewed nervousness among banks that lending to renewable power utilities and telecom companies over the last five years may turn bad.

Payment dues of renewable energy generators are mounting, primarily as distribution companies (discoms) of states such as Andhra Pradesh, Tamil Nadu and Telangana have been falling back on payments for electricity contracted. The dues were pegged at close to Rs 10,000 crore upto July 31, 2019, according to data compiled by the Central Electricity Authority, and the amount is piling up.

Delays have started to stretch beyond 12 months in some cases, effectively impeding the working capital flows for these companies and hindering their debt servicing capability — a warning sign for lenders. In all, over 15 discoms have fallen back on their payment obligations against electricity supplied by solar and wind energy developers — the only bright spark in an otherwise sluggish electricity sector.

Added to the concern for lenders is the fresh uncertainty in the telecom sector posed by the Supreme Court’s decision to uphold the Department of Telecommunications’ definition of adjusted gross revenue (AGR), which means telcos need to shell out about Rs 92,500 crore. Over 40% of this amount is due from from firms such as Aircel Ltd and Reliance Communications Ltd that have either filed for bankruptcy or wound up operations. Bulk of the remainder is due from Vodafone Idea Ltd and Bharti Airtel Ltd, which together owe the government about Rs 50,000 crore, in a 4:3 ratio.

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Vodafone Idea could be in trouble since its cash balance at the end of the June-quarter stood at Rs 21,200 crore, far lower than the Rs 28,300 crore needed to meet the government demand. Its promoters have already indicated they are less than inclined to pitch in.

The power sector accounts for almost half the credit to the infrastructure sector, with the telecom sector coming in second. In the power sector, the renewable energy sector witnessed significant FDI inflows of $3.22 billion over the last four years. This came alongside domestic investment leveraged mostly by bank funding.

Upto end-August 2019, installed power capacity stood at around 80.63 gigawatts (GW). Around half the capacity was added during the last five years, most of which has been implemented by private players and funded at a debt:equity ratio of 70:30.

In an October note on Indian banks and financial institutions, US-based investment banking firm Jefferies Group LLC said Bank of Baroda, Axis Bank, ICICI Bank, and State Bank of India could be staring at another wave of NPAs, especially in the telecom and construction sector, as there appeared to be “a divergence between the credit rating assigned and the financial health of the corresponding corporate entity”.

The concerns over bad loans come at a time when credit to infrastructure, which makes up a third of bank credit to industry, has been contracting since April 2016. While credit offtake returned to the positive territory in July 2018, loan impairments resulting in lending constraints have a steady source of concern, especially in telecom and power. Fresh funding has largely been restricted to renewable energy generation over the last five years.

While large renewable energy generators are managing the stress arising from payment delays by discoms because of their diversified operations and financial flexibility, prolonged delay in resolution of the issues, according to rating agency Crisil, can hurt credit outlook and moderate investor sentiment. The smaller players are worse off. Crisil analysed 10 leading renewable companies which won around half the projects awarded in the past two years and accounted for around 32% of the installed renewable capacity.

The fresh scare for banks comes amid warnings of contagion risk. Rating agency Standard and Poor’s (S&P) last Wednesday said it sees a rising risk of contagion in the Indian financial sector as many finance companies have lost more than half their equity value in the past year, and credit markets are charging huge premiums on debt issued by riskier finance companies. Fresh NPAs in sectors such as power and telecom could aggravate matters further.

On the power sector, Manish Gupta, Senior Director, CRISIL Rating said, “While smaller companies with single-asset exposure to Andhra Pradesh and Telangana discoms were impacted the most, leading diversified renewable companies have managed the stress better. On aggregate, these may see their receivables days jump by 35-45 days by the end of the current fiscal, from around 115 days in fiscal 2019. This is despite Andhra Pradesh and Telangana stretching payments by more than 240 days,” he said.

The red-flags in the power sector comes in the wake of two state-owned discoms of Andhra Pradesh moving to reopen contracts signed with wind generators earlier this year, a step that threatened to impact at least 40 of India’s biggest RE developers. This had triggered concerns that other states could take cue and initiate similar reopening of wind and solar project PPAs (power purchase agreements) on the same grounds cited by the Andhra discoms – that tariffs discovered in subsequent years have been cheaper.