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Discoms to keep stoking Banks' NPA worry if finances don't improve: Moody's Report

The Indian power sector would continue to be a source of asset quality risk for public and private sector banks in India if the poor financial profiles of state electricity board distribution companies (discoms) do not improve through further structural reforms, ratings agency Moody's said in a report on Wednesday.

"The poor financial health of discoms in India is one of the key factors weighing on the asset quality of the country's banks," Srikanth Vadlamani, vice-president and senior analyst at Moody's said.

According to Moody's, public sector banks have both direct and indirect credit exposure to discoms; private sector banks have almost no direct exposure, but they are exposed indirectly if problems with discoms affect the credit quality of other borrowers in the electricity supply chain.

It adds that for public sector banks, loans to discoms as a proportion of total loans range from 1 Percent at SBI to 14 Percent at Central Bank of India as of the end of 2013.

“While loans to discoms are a relatively small portion of overall loans, they are a much larger share of many public sector banks’ impaired loans, with impaired loans to discoms comprising more than 10 Percent  of total impaired loans at all PSBs except for SBI and reaching levels as high as 46 Percent at OBC and 48 Percent at Central Bank.”

Unlike PSBs, which in many cases effectively had no choice but to provide credit to discoms given government ownership and role in their management, private banks have mostly avoided directly lending to discoms given their weak finances.

Asset quality at banks has deteriorated in the last couple of years; at the end of March 2014, loans of INR 2,50,715 crore were non-performing, according to Capitaline data.

The Moody's report said that government measures taken in the last two years have only provided temporary relief to the banks exposed to discom loans. The steps included the substitution of impaired loans with government obligations and some operational improvements including tariff hikes.

The discoms' key problems — pricing based on non-commercial considerations and inefficient operations — have not been addressed, and a political consensus to allow discoms to price power based on commercial considerations continues to be lacking, the report added.

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