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Money Nov 2, 2011

Rs 1 lakh cr and counting: No end to power sector's losses

By Rajanya Bose

State distribution companies, which are already reeling under losses of more than Rs 1 lakh crore, face the very real threat of having their interest costs being raised further.

That's because borrowing costs for Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), the two biggest lenders to the power sector, are likely to rise.

The removal of the "stable" tag means its cost of borrowing rises. Reuters

Why is that? Well, that might happen because credit rating agency Icra removed the "stable" outlook from the ratings of both institutions. It alsowithdrew the outlook on the outstanding long-term and fixed deposit ratings for PFC.

The ratings agency said it is "unable to ascertain the outlook, in the absence of clarity on critical measures" to improve the situation for both state electricity boards (SEBs) and independent power producers (IPPs).

Credit ratings are important for any company planning to raise funds. The removal of the "stable" tag means its cost of borrowing rises.

If the power sector's lenders are being downgraded, in a manner of speaking, there will be a spillover effect on borrowers for sure.

If distribution companies are unable to pay independent power producers for the purchase of supplies, cash flows of IPPs will come under further strain.Support from state governments by way of subsidies is also under threat because of the financially weak position of the governments themselves. In addition, financial support often arrives too late.The government is also looking at reducing transmission and distribution losses and other measures to stem the financial bleeding.

Icra, however, doesn't think too much of these plans because whatever has to be done has to be done immediately and that, as yet, seems unlikely.

There is one silver lining: PFC's and REC's ratings have been maintained at AAA primarily because REC's collection rate from SEBs has been maintained at a healthy 98-99 percent, while it is 99 percent for PFC.

Still, the widely reported financial problems of the sector is making most lenders, including banks, wary about lending to companies.A Macquarie Research report pointed out that 40 percent of loans given to the power sector by banks might need to be restructured.

Indeed, the firing shot has already been fired by Punjab National Bank, which announced that it has restructured Rs 2,000 crore of loans given to the power sector in the past quarter.

Even though we've said it before, we'll say it again: the Indian power sector is headed for big, big trouble.

Watch video:Public sector banks have nearly Rs 1-lakh crore exposure to state electricity distribution companies. And, with many of these companies almost on the verge of default, public sector banks now seem to have no choice but to begin restructuring their loans.

by Rajanya Bose

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