Biggest drop in power demand adds to banks’ NPA woes

By Rajesh Kumar Singh

The biggest drop in India’s electricity demand in at least 12 years is hindering efforts of Indian lenders to recover a pile of loans to power producers that have soured. Banks had about Rs 1.8 trillion ($25 billion) of stressed loans to India’s coal-fired power generators as of last year, according to the State Bank of India.

Prospective bidders for these stressed generators are wary as demand from the country’s power distribution utilities contracted in three straight months to October.

India’s electricity demand is closely linked to its industrial output, which contracted in September to its lowest level in eight years. An overwhelming majority of data is pointing to continued weakness in the economy that expanded 5% in the quarter ended June -- the slowest pace in six years.

Flagging electricity demand “clouds efforts to resolve bad debt in the power sector,” said Debasish Mishra, partner at Deloitte Touche Tohmatsu in Mumbai. “Some bidders evaluating these power generators might demand even deeper haircut from banks.”

Drop in demand is adding to the weak financial health of the power distribution companies, also called discoms. These state-controlled utilities often serve the populist plans of their political masters by selling power below cost to certain groups of consumers, which leaves them financially broke.

Booming demand has often been seen as an answer to this problem, giving room to discoms to raise prices and bridge the gap between the cost of supplies and revenues. Weak demand exacerbates the problems, imperiling the entire sector.

However, some power projects, including GMR Chhattisgarh Energy Ltd., and SKS Power Generation Chhattisgarh Ltd. have found new bidders, while some others including RattanIndia Power Ltd.’s Amravati project in Maharashtra and GMR Kamalanga are nearing a resolution with lenders writing off part of the loans.

“Loan write-offs are set to go deeper, as bidders will grapple with new realities of slowing economic growth and declining power demand,” said Hemant Kanoria, chairman at Srei Infrastructure Finance Ltd., which bids for stressed assets. “India needs to help lenders nurse these assets back to health rather than sell them off at distressed prices.”