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  3. Asset quality risks from power sector weaknesses to persist: Moody

Asset quality risks from power sector weaknesses to persist: Moody

19 Jun 2014 Evaluate

Credit rating agency, Moody Investor Service, in its reports has stated that India’s power sector will continue to remain a source of asset quality risk for banks, provided the poor financial profiles of state electricity board distribution companies (discoms) are not addressed through further structural reforms. According to the agency, the poor financial health of discoms in India was one of the key factors weighing on asset quality of the country's banks and further pointed that most of PSU bank’s asset quality problem were directly and indirectly exposed to the credit quality of discoms.

While, for private sector banks, it underscored that these banks have almost no direct exposure to discoms, but do have indirect exposure, which would mean that problems with discoms would affect the credit quality of other borrowers in the electricity supply chain, especially power- generating companies, which are also creditors of the discoms.

Further, it pointed that even government-owned two financial institutions specialising in the provision of funds to the electricity sector, namely Power Finance Corporation and Rural Electrification Corporation, were not immune from the power-sector challenges. But, at the same time highlighted that these specialized financial institutions' positions were comparatively stable, since these entities benefit from number of protections, including an escrow account structure that effectively grants them priority of claims on their borrower's receivables, including those of discoms.

Lastly, Moody's report also pointed out that of all impaired loans at public-sector banks, 20% were discom exposures, with the proportion ranging as high as 48% at some of the most exposed banks.

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