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Power Sector LendersWill the credit quality trip?Will the credit quality trip?
October 2011October 2011
A knowledge sharing endeavour from CRISIL
Insights
Foreword
Power Sector Lenders: Will the credit quality trip?
For over two decades, CRISIL has helped shape the evolution of the debt markets in India, and has added value to market participants in a variety of ways.
‘CRISIL Insights’ is a knowledge sharing endeavour from CRISIL tol Share our analytical insights and thought leadership perspectives
m CRISIL continues to focus on developing a strong understanding of the Indian economy, corporate sector, and financial landscape
m The knowledge and insights gained in this process are constantly shared with issuers and investors on relevant topics that impact the credit markets
l Generate awareness about the rigour followed in our ratings processm As the country’s leading ratings agency, CRISIL has always set standards in analytical
rigour, disclosures, and best practices in the industrym CRISIL tries to generate familiarity of the market participants with the same
l Enhance transparency of our analytical methodology and criteriam To develop confidence of the debt market participants, CRISIL constantly endeavours
to highlight the analytical methodology and criteria used in its ratings process
CRISIL Ratings hopes that you find this research valuable, insightful, and useful. Your comments and queries regarding the issues discussed here are welcome.
Warm Regards,
Ramraj PaiDirector - Ratings
As a part of our knowledge sharing endeavour, I am delighted to present this compendium of articles on India's power sector and power sector lenders.
Given the criticality of the sector and rising risks, there is a keen desire from investors to understand the sector's outlook and its implications for the lenders. The various articles in this compendium highlight insights gained from our analysis of state power utilities (SPUs), distribution entities, generation companies, and lenders to the sector.
In preparing this outlook, we have been constrained by lack of updated and aggregated financial information for SPUs - which distribute nearly 95 per cent of India's power, account for nearly two-thirds of the sector's total debt, and nearly its entire losses - this, in our opinion, significantly adds to the risks for investors. We have gathered information from various industry participants, leveraged our domain understanding (arising from having rated nearly 200 entities in the power industry), and used qualitative estimates, to build and project a landscape for the sector.
After a series of reforms over the past decade, risks in the Indian power sector are again rising - primarily from a weak financial risk profile of state distribution companies (discoms) - CRISIL estimates that the losses of discoms increased to Rs.350-400 billion in 2010-11. These losses can be still higher if the large receivables of SPUs need to be written-off. As a result, the outstanding debt of discoms has risen to Rs.2.1 trillion at the end of March 2011, and can further grow to Rs.3.3 trillion over the next two years.
Further, power generation companies face a structural threat in the form of fuel unavailability and pricing. CRISIL estimates that nearly one-third of capacity under implementation (nearly 20,000 MW) has no- or limited-pass-through of costs, which can impact their viability.
This weakening performance of power sector, unless reversed, can impact the financial system. The total exposure of banks and infrastructure finance companies to the power sector stood at a significant Rs.4.8 trillion, at the end of March 2011, and will grow at a rate of 23 per cent annually till March 2013.
Even though the asset quality of lenders to power sector has remained comfortable so far, it is vulnerable to the heightened risks in the sector. As per a CRISIL study, nearly 45 per cent of the lenders' power sector exposure is to higher-risk SPUs. Despite this vulnerability, the credit risk profiles of specialised power sector lenders are underpinned by two key factors - first, an expectation of policy and funding support from the Government of India (GoI), given their strategic importance; and second, an expectation of visible reforms in the sector.
CRISIL believes that strong policy measures are urgently needed to reform the distribution sector. These include timely availability of dependable financial information, meaningful and regular tariff hikes to enable recovery of economic costs of power supply, and significant reduction in the distribution losses. Further, higher and timely provisions of subsidies by the state governments are critical to reduce their dependence on short-term borrowings.
The government has initiated steps to contain, and gradually improve, the performance of SPUs. These initial measures, however, need to be sustained over a period of time. In absence of any substantive progress over the next 12 to 18 months, the asset quality of power sector lenders will weaken, and they will require additional capital to maintain adequate coverage for the increased delinquencies.
We hope you will find our insights and analysis useful. We welcome your feedback.
A knowledge sharing endeavour from CRISIL
Insights
About CRISIL Insights
Foreword
Power Sector Lenders: Will the credit quality trip?
For over two decades, CRISIL has helped shape the evolution of the debt markets in India, and has added value to market participants in a variety of ways.
‘CRISIL Insights’ is a knowledge sharing endeavour from CRISIL tol Share our analytical insights and thought leadership perspectives
m CRISIL continues to focus on developing a strong understanding of the Indian economy, corporate sector, and financial landscape
m The knowledge and insights gained in this process are constantly shared with issuers and investors on relevant topics that impact the credit markets
l Generate awareness about the rigour followed in our ratings processm As the country’s leading ratings agency, CRISIL has always set standards in analytical
rigour, disclosures, and best practices in the industrym CRISIL tries to generate familiarity of the market participants with the same
l Enhance transparency of our analytical methodology and criteriam To develop confidence of the debt market participants, CRISIL constantly endeavours
to highlight the analytical methodology and criteria used in its ratings process
CRISIL Ratings hopes that you find this research valuable, insightful, and useful. Your comments and queries regarding the issues discussed here are welcome.
Warm Regards,
Ramraj PaiDirector - Ratings
As a part of our knowledge sharing endeavour, I am delighted to present this compendium of articles on India's power sector and power sector lenders.
Given the criticality of the sector and rising risks, there is a keen desire from investors to understand the sector's outlook and its implications for the lenders. The various articles in this compendium highlight insights gained from our analysis of state power utilities (SPUs), distribution entities, generation companies, and lenders to the sector.
In preparing this outlook, we have been constrained by lack of updated and aggregated financial information for SPUs - which distribute nearly 95 per cent of India's power, account for nearly two-thirds of the sector's total debt, and nearly its entire losses - this, in our opinion, significantly adds to the risks for investors. We have gathered information from various industry participants, leveraged our domain understanding (arising from having rated nearly 200 entities in the power industry), and used qualitative estimates, to build and project a landscape for the sector.
After a series of reforms over the past decade, risks in the Indian power sector are again rising - primarily from a weak financial risk profile of state distribution companies (discoms) - CRISIL estimates that the losses of discoms increased to Rs.350-400 billion in 2010-11. These losses can be still higher if the large receivables of SPUs need to be written-off. As a result, the outstanding debt of discoms has risen to Rs.2.1 trillion at the end of March 2011, and can further grow to Rs.3.3 trillion over the next two years.
Further, power generation companies face a structural threat in the form of fuel unavailability and pricing. CRISIL estimates that nearly one-third of capacity under implementation (nearly 20,000 MW) has no- or limited-pass-through of costs, which can impact their viability.
This weakening performance of power sector, unless reversed, can impact the financial system. The total exposure of banks and infrastructure finance companies to the power sector stood at a significant Rs.4.8 trillion, at the end of March 2011, and will grow at a rate of 23 per cent annually till March 2013.
Even though the asset quality of lenders to power sector has remained comfortable so far, it is vulnerable to the heightened risks in the sector. As per a CRISIL study, nearly 45 per cent of the lenders' power sector exposure is to higher-risk SPUs. Despite this vulnerability, the credit risk profiles of specialised power sector lenders are underpinned by two key factors - first, an expectation of policy and funding support from the Government of India (GoI), given their strategic importance; and second, an expectation of visible reforms in the sector.
CRISIL believes that strong policy measures are urgently needed to reform the distribution sector. These include timely availability of dependable financial information, meaningful and regular tariff hikes to enable recovery of economic costs of power supply, and significant reduction in the distribution losses. Further, higher and timely provisions of subsidies by the state governments are critical to reduce their dependence on short-term borrowings.
The government has initiated steps to contain, and gradually improve, the performance of SPUs. These initial measures, however, need to be sustained over a period of time. In absence of any substantive progress over the next 12 to 18 months, the asset quality of power sector lenders will weaken, and they will require additional capital to maintain adequate coverage for the increased delinquencies.
We hope you will find our insights and analysis useful. We welcome your feedback.
A knowledge sharing endeavour from CRISIL
Insights
About CRISIL Insights
Analytical contacts
Name Designation Email Id
Pawan Agrawal Director - Corporate & Government Sector Ratings [email protected]
Nagarajan Narasimhan Director - Corporate & Government Sector Ratings [email protected]
Sudip Sural Head - Corporate & Infrastructure Sector Ratings [email protected]
Suman Chowdhury Head - Financial Sector Ratings [email protected]
Anosh Kelawala Senior Manager - Financial Sector Ratings [email protected]
Manish Ballabh Senior Manager - Corporate & Infrastructure Sector Ratings [email protected]
Manoj Damle Senior Manager - Financial Sector Ratings [email protected]
Rohit Chugh Senior Manager - Corporate & Infrastructure Sector Ratings [email protected]
Khyati Shah Manager - Corporate & Infrastructure Sector Ratings [email protected]
Manish Saraf Manager - Financial Sector Ratings [email protected]
Nitesh Jain Manager - Corporate & Infrastructure Sector Ratings [email protected]
Subhasri Narayanan Manager - Financial Sector Ratings [email protected]
Vaibhav Kapoor Manager - Corporate & Infrastructure Sector Ratings [email protected]
Power Sector Lenders: Will the credit quality trip?
Table of Contents
Meaningful action on reforms critical for health of power sector 1
Credit quality of power sector lenders - potential risks ahead 5
Power distribution utilities - current issues and what lies ahead 15
Risks related to fuel and project execution will increase power generation costs 29
FAQs on Power Finance Corporation Limited 37
FAQs on Rural Electrification Corporation Limited 55
List of Rated Entities in the Power Sector 75
Analytical contacts
Name Designation Email Id
Pawan Agrawal Director - Corporate & Government Sector Ratings [email protected]
Nagarajan Narasimhan Director - Corporate & Government Sector Ratings [email protected]
Sudip Sural Head - Corporate & Infrastructure Sector Ratings [email protected]
Suman Chowdhury Head - Financial Sector Ratings [email protected]
Anosh Kelawala Senior Manager - Financial Sector Ratings [email protected]
Manish Ballabh Senior Manager - Corporate & Infrastructure Sector Ratings [email protected]
Manoj Damle Senior Manager - Financial Sector Ratings [email protected]
Rohit Chugh Senior Manager - Corporate & Infrastructure Sector Ratings [email protected]
Khyati Shah Manager - Corporate & Infrastructure Sector Ratings [email protected]
Manish Saraf Manager - Financial Sector Ratings [email protected]
Nitesh Jain Manager - Corporate & Infrastructure Sector Ratings [email protected]
Subhasri Narayanan Manager - Financial Sector Ratings [email protected]
Vaibhav Kapoor Manager - Corporate & Infrastructure Sector Ratings [email protected]
Power Sector Lenders: Will the credit quality trip?
Table of Contents
Meaningful action on reforms critical for health of power sector 1
Credit quality of power sector lenders - potential risks ahead 5
Power distribution utilities - current issues and what lies ahead 15
Risks related to fuel and project execution will increase power generation costs 29
FAQs on Power Finance Corporation Limited 37
FAQs on Rural Electrification Corporation Limited 55
List of Rated Entities in the Power Sector 75
1
Meaningful action on reforms critical for health of power sector
The power distribution companies (discoms) in India have, historically, been riddled with
losses and beset by inefficiencies. While most state electricity boards (SEBs) have met the
requirement of trifurcation into generation, transmission and distribution entities, as
mandated by the Indian Electricity Act, 2003, the stated objectives of the reorganisation have
not been fully met. CRISIL believes that the focused efforts initiated by the Government and
key stakeholders have the potential to address the challenges facing the entire power value
chain. While the first meaningful steps have been taken, the sustainability of the reforms
programme will be critical.
CRISIL estimates the net losses (subsidy booked basis) of discoms at around Rs.350 - 400 billion
for 2010-11 (refers to financial year, April 1 to March 31). The widening revenue gap, because
of inadequate and delayed tariff revisions, high aggregate technical and commercial (AT&C)
losses, and sizeable outstanding debt with significant interest costs have led to the mounting
losses of discoms. Profitability pressures appear set to increase further for discoms because of
their susceptibility to volatility in fuel costs, escalating capital costs, and project risks on the
generation front. These factors are likely to translate into an annual increase of 10 to 12 per
cent in average power generation costs over the next two years, which will largely be passed
on to the discoms.
The central power utilities have, thus far, been protected from the discoms' woes because of
the one-time settlement scheme and payment security mechanisms set in place in 2001 by
the Ahluwalia Committee. The discoms' losses have, however, now begun to stretch the
working capital requirements of the generation companies.
The cascading effect of the problems faced by discoms will not be limited to the power sector.
The discoms have continued to borrow from banks, often supported by state guarantees, over
the past two years. Some banks are approaching their exposure limits for the sector, and
already, exhibit increased reluctance to lend further to the sector. CRISIL estimates that large
loss funding has significantly increased discom debt to around Rs.2.1 trillion as on March 31,
2011. Given that a significant portion of the debt has been used to finance losses rather than
create productive assets, the debt only adds to the sector's inefficiencies.
Mounting power purchase costs further weaken discoms' financials
Discom distress can affect entire power value chain, including financiers
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
1
Meaningful action on reforms critical for health of power sector
The power distribution companies (discoms) in India have, historically, been riddled with
losses and beset by inefficiencies. While most state electricity boards (SEBs) have met the
requirement of trifurcation into generation, transmission and distribution entities, as
mandated by the Indian Electricity Act, 2003, the stated objectives of the reorganisation have
not been fully met. CRISIL believes that the focused efforts initiated by the Government and
key stakeholders have the potential to address the challenges facing the entire power value
chain. While the first meaningful steps have been taken, the sustainability of the reforms
programme will be critical.
CRISIL estimates the net losses (subsidy booked basis) of discoms at around Rs.350 - 400 billion
for 2010-11 (refers to financial year, April 1 to March 31). The widening revenue gap, because
of inadequate and delayed tariff revisions, high aggregate technical and commercial (AT&C)
losses, and sizeable outstanding debt with significant interest costs have led to the mounting
losses of discoms. Profitability pressures appear set to increase further for discoms because of
their susceptibility to volatility in fuel costs, escalating capital costs, and project risks on the
generation front. These factors are likely to translate into an annual increase of 10 to 12 per
cent in average power generation costs over the next two years, which will largely be passed
on to the discoms.
The central power utilities have, thus far, been protected from the discoms' woes because of
the one-time settlement scheme and payment security mechanisms set in place in 2001 by
the Ahluwalia Committee. The discoms' losses have, however, now begun to stretch the
working capital requirements of the generation companies.
The cascading effect of the problems faced by discoms will not be limited to the power sector.
The discoms have continued to borrow from banks, often supported by state guarantees, over
the past two years. Some banks are approaching their exposure limits for the sector, and
already, exhibit increased reluctance to lend further to the sector. CRISIL estimates that large
loss funding has significantly increased discom debt to around Rs.2.1 trillion as on March 31,
2011. Given that a significant portion of the debt has been used to finance losses rather than
create productive assets, the debt only adds to the sector's inefficiencies.
Mounting power purchase costs further weaken discoms' financials
Discom distress can affect entire power value chain, including financiers
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
3
Focused efforts by Government and financiers to address the challengesThe following concerted measures are geared towards addressing the challenges faced by the
sector:l Commitment of State Governments: Following the formation of the Shunglu Committee
on State Power Utilities, the state power ministers adopted a 12-point resolution in July
2011, addressing the key problems faced by discoms and the commitment of monetary
and administrative support by state governments to resolve the challenges plaguing the
discom sector. Timely tariff filing with the objective of bridging revenue gaps and
automatic pass through of fuel cost increases were some of the key points adopted in the
resolution. The state governments have also adopted a resolution to shore up the balance
sheets of discoms by converting state government loans to equity and clearing up subsidy
dues. l Lender's efforts: At the same time, in an attempt to discipline the fiscal management of
discoms, banks and power financiers have come together and begun linking disbursal of
funds to improvement in discoms' performance. This is to ensure that weak discoms do
not take advantage of competition amongst lenders. l Performance-linked credit mechanism: The Ministry of Power (MoP) is also
contemplating merit-linked credit disbursal to discoms based on their operating
performance and credit rating.l AT&C loss reduction: The MoP launched Government of India-funded Restructured
Accelerated Power Development and Reforms Programme (R-APDRP) in July 2008 aimed
at bringing down the AT&C losses in the sector. With a corpus of Rs.100 billion for Part-A
projects and Rs.400 billion for Part-B projects, the R-APDRP scheme can go a long way in
reducing the AT&C losses. The cumulative sanctions and disbursements under this
scheme since inception have been Rs.220 billion and Rs.40 billion, respectively.
The government's efforts have spurred initial action on the ground. At least five states have
announced tariff hikes for 2011-12 over the past two to three months. While these tariff hikes
fall short of the required increase to bridge the losses, some discoms have announced hikes
after long gaps. These are encouraging signs and CRISIL believes that despite political
compulsions, such hikes will have to continue over the medium term in order to bridge the
large revenue gap. However, it is the seriousness and urgency with which further steps
(particularly pertaining to progress on AT&C loss reduction and timely receipt of state
government subsidy) are implemented, that will have a crucial bearing on the health of the
sector.
Road ahead
CRISIL believes that some of the initial steps will be sustained over the medium term, and that
further build-up of stress will be arrested and the annual losses contained. CRISIL projects
that the discom sector's net losses (subsidy booked basis) will be contained at broadly the
same levels for 2011-12 and 2012-13. However, the debt will increase to Rs.3.3 trillion as on
March 31, 2013, from Rs.2.1 trillion as on March 31, 2011. CRISIL's base case assumptions for
2011-12 and 2012-13 are as follows:
l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes, and the
curtailed lending by banksl Reduction of AT&C losses taking benefit of the R-APDRP schemel State government subsidy to increase, given the fact that funding from banks and
financial institutions will not be available for weaker discoms, compelling state
governments to bridge the gap
CRISIL believes that concrete action according to the plan laid out by the main stakeholders--
the Government of India, state governments, and the lenders--will be key to addressing the
challenges facing the discom sector. If progress on this front is delayed, the adverse impact on
the power value chain as well as power financiers would begin to manifest itself over the next
12 to 18 months.
CRISIL's opinion piece, 'Power Distribution Utilities current issues and what lies ahead' details
the challenges that the discoms continue to face. The commentary, 'Risks related to fuel and
project execution will increase power generation costs', addresses emerging challenges for
the generation sector, and their fallout on discoms.
Meaningful action on reforms critical for health of power sector
Power Sector Lenders: Will the credit quality trip?
3
Focused efforts by Government and financiers to address the challengesThe following concerted measures are geared towards addressing the challenges faced by the
sector:l Commitment of State Governments: Following the formation of the Shunglu Committee
on State Power Utilities, the state power ministers adopted a 12-point resolution in July
2011, addressing the key problems faced by discoms and the commitment of monetary
and administrative support by state governments to resolve the challenges plaguing the
discom sector. Timely tariff filing with the objective of bridging revenue gaps and
automatic pass through of fuel cost increases were some of the key points adopted in the
resolution. The state governments have also adopted a resolution to shore up the balance
sheets of discoms by converting state government loans to equity and clearing up subsidy
dues. l Lender's efforts: At the same time, in an attempt to discipline the fiscal management of
discoms, banks and power financiers have come together and begun linking disbursal of
funds to improvement in discoms' performance. This is to ensure that weak discoms do
not take advantage of competition amongst lenders. l Performance-linked credit mechanism: The Ministry of Power (MoP) is also
contemplating merit-linked credit disbursal to discoms based on their operating
performance and credit rating.l AT&C loss reduction: The MoP launched Government of India-funded Restructured
Accelerated Power Development and Reforms Programme (R-APDRP) in July 2008 aimed
at bringing down the AT&C losses in the sector. With a corpus of Rs.100 billion for Part-A
projects and Rs.400 billion for Part-B projects, the R-APDRP scheme can go a long way in
reducing the AT&C losses. The cumulative sanctions and disbursements under this
scheme since inception have been Rs.220 billion and Rs.40 billion, respectively.
The government's efforts have spurred initial action on the ground. At least five states have
announced tariff hikes for 2011-12 over the past two to three months. While these tariff hikes
fall short of the required increase to bridge the losses, some discoms have announced hikes
after long gaps. These are encouraging signs and CRISIL believes that despite political
compulsions, such hikes will have to continue over the medium term in order to bridge the
large revenue gap. However, it is the seriousness and urgency with which further steps
(particularly pertaining to progress on AT&C loss reduction and timely receipt of state
government subsidy) are implemented, that will have a crucial bearing on the health of the
sector.
Road ahead
CRISIL believes that some of the initial steps will be sustained over the medium term, and that
further build-up of stress will be arrested and the annual losses contained. CRISIL projects
that the discom sector's net losses (subsidy booked basis) will be contained at broadly the
same levels for 2011-12 and 2012-13. However, the debt will increase to Rs.3.3 trillion as on
March 31, 2013, from Rs.2.1 trillion as on March 31, 2011. CRISIL's base case assumptions for
2011-12 and 2012-13 are as follows:
l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes, and the
curtailed lending by banksl Reduction of AT&C losses taking benefit of the R-APDRP schemel State government subsidy to increase, given the fact that funding from banks and
financial institutions will not be available for weaker discoms, compelling state
governments to bridge the gap
CRISIL believes that concrete action according to the plan laid out by the main stakeholders--
the Government of India, state governments, and the lenders--will be key to addressing the
challenges facing the discom sector. If progress on this front is delayed, the adverse impact on
the power value chain as well as power financiers would begin to manifest itself over the next
12 to 18 months.
CRISIL's opinion piece, 'Power Distribution Utilities current issues and what lies ahead' details
the challenges that the discoms continue to face. The commentary, 'Risks related to fuel and
project execution will increase power generation costs', addresses emerging challenges for
the generation sector, and their fallout on discoms.
Meaningful action on reforms critical for health of power sector
Power Sector Lenders: Will the credit quality trip?
5
Credit quality of power sector lenders - potential risks ahead
Executive Summary
Overview of borrowings by the power sector
Given the funding needs of upcoming private sector power projects and state power utilities
(SPUs), CRISIL believes that the exposure of lenders to the power sector will continue to
increase over the medium term. While the incremental exposure of banks will remain
primarily to private generation projects, specialised lenders such as Power Finance
Corporation Ltd (PFC) and Rural Electrification Corporation Ltd (REC) will continue to be the
key financiers to the SPUs.
Despite challenges in lending to the power sector, lenders have maintained healthy asset
quality thus far, with negligible reported gross non-performing assets (NPAs). The banks'
diversified loan portfolios and comfortable capitalisation, partly offsets the impact of NPAs.
The credit risk profiles of the specialised power sector lenders is supported by their strategic
importance to the Government of India, their comfortable capitalisation and earnings, and
their asset protection mechanisms (refer to CRISIL article, 'Frequently asked questions [FAQs]
on PFC and REC,' for further details).
Systemic risks in lending to the power sector have increased significantly in the recent past,
primarily because of increasing losses and the substantial debt of the SPUs, particularly,
distribution companies. CRISIL believes that attempts to reform the distribution sector is
likely to lead to improved efficiency and reduced transmission and distribution losses, and
arrest the build up of stress in the distribution sector. If, on the other hand, status quo
continues, asset-side risks will increase for power sector lenders, especially for specialised
lenders such as PFC and REC. The pace and degree of reforms in the sector, therefore, will be a
key monitorable over the next 12 to 18 months.
The borrowings of the power sector - the SPUs, central power utilities (CPUs), and private
sector power utilities - are estimated at around Rs.6.5 trillion as on March 31, 2011. Of this,
lenders - banks, infrastructure financing non-banking finance companies (NBFC-IFCs), such as
PFC and REC, and other IFCs, and India Infrastructure Finance Company Ltd (IIFCL), extended
around 75 per cent of the power sector's borrowings (see Chart 1). The remaining 25 per cent
of the sector's borrowings is from sources such as bonds, the central and state government
loans, and foreign currency borrowings.
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
5
Credit quality of power sector lenders - potential risks ahead
Executive Summary
Overview of borrowings by the power sector
Given the funding needs of upcoming private sector power projects and state power utilities
(SPUs), CRISIL believes that the exposure of lenders to the power sector will continue to
increase over the medium term. While the incremental exposure of banks will remain
primarily to private generation projects, specialised lenders such as Power Finance
Corporation Ltd (PFC) and Rural Electrification Corporation Ltd (REC) will continue to be the
key financiers to the SPUs.
Despite challenges in lending to the power sector, lenders have maintained healthy asset
quality thus far, with negligible reported gross non-performing assets (NPAs). The banks'
diversified loan portfolios and comfortable capitalisation, partly offsets the impact of NPAs.
The credit risk profiles of the specialised power sector lenders is supported by their strategic
importance to the Government of India, their comfortable capitalisation and earnings, and
their asset protection mechanisms (refer to CRISIL article, 'Frequently asked questions [FAQs]
on PFC and REC,' for further details).
Systemic risks in lending to the power sector have increased significantly in the recent past,
primarily because of increasing losses and the substantial debt of the SPUs, particularly,
distribution companies. CRISIL believes that attempts to reform the distribution sector is
likely to lead to improved efficiency and reduced transmission and distribution losses, and
arrest the build up of stress in the distribution sector. If, on the other hand, status quo
continues, asset-side risks will increase for power sector lenders, especially for specialised
lenders such as PFC and REC. The pace and degree of reforms in the sector, therefore, will be a
key monitorable over the next 12 to 18 months.
The borrowings of the power sector - the SPUs, central power utilities (CPUs), and private
sector power utilities - are estimated at around Rs.6.5 trillion as on March 31, 2011. Of this,
lenders - banks, infrastructure financing non-banking finance companies (NBFC-IFCs), such as
PFC and REC, and other IFCs, and India Infrastructure Finance Company Ltd (IIFCL), extended
around 75 per cent of the power sector's borrowings (see Chart 1). The remaining 25 per cent
of the sector's borrowings is from sources such as bonds, the central and state government
loans, and foreign currency borrowings.
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
7
This article focuses on these key lenders' exposure to the power sector, and assesses their
asset quality.
CRISIL believes that the lenders' power sector advances will continue to increase steadily over
the medium term. The lenders' power sector advances have grown at a compound annual
growth rate (CAGR) of about 31 per cent to Rs.4.8 trillion as on March 31, 2011 from Rs.1.3
trillion as on March 31, 2006.
CRISIL estimates that advances to the sector will grow further, at a CAGR of 23 per cent over
the next two years to about Rs.7.3 trillion as on March 31, 2013 (see Chart 2). The growth will
be driven primarily by the strong pipeline of undisbursed sanctions to the power sector.
Nevertheless, growth in power sector advances may moderate, given the lenders' increasing
caution in disbursing to the sector, especially to the SPUs. The banks, in particular, have
slowed down fresh sanctions to new power sector projects. The sector will also look to the
lenders to fund its ongoing investments in transmission and distribution, increasing working
capital requirements due to increased losses of distribution companies, and projects under
implementation.
Lenders' power sector exposures to increase further
Banks to remain major lenders
The share of power sector advances in the banking industry's total advances has almost
doubled to 7.3 per cent as on March 31, 2011 from 3.7 per cent as on March 31, 2008. CRISIL
estimates the banks' outstanding undisbursed sanctions as exceeding Rs.1.3 trillion as on
March 31, 2011. Disbursements from existing sanctions and conversion of non-fund exposures
to fund-based exposures may increase the share of power sector advances to about 7.8 per
cent of banks' total advances by March 31, 2013 (see Chart 3).
Chart 2: Growth trend in power sector advances
0
1
2
3
4
5
6
7
8
2006 2007 2008 2009 2010 2011 2013 (P)
As on March 31,
5 year CAGR of 31%
Chart 3: Growth in banking industry's power sector advances
4.0% 3.7% 3.8%4.8%
6.2%
7.3%7.8%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2006 2007 2008 2009 2010 2011 2013 (P)
As of March
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Power sector Advances Undisbursed sanctions Share in total advances
Undisbursed Sanctions
Rs.
Tri
llio
nR
s. T
rilli
on
Credit quality of power sector lenders - potential risks ahead
Power Sector Lenders: Will the credit quality trip?
Banks42%
Others25%
Other IFCs5%
PFC + REC28%
Chart 1: Source of borrowings by power sector as on March 31, 2011
7
This article focuses on these key lenders' exposure to the power sector, and assesses their
asset quality.
CRISIL believes that the lenders' power sector advances will continue to increase steadily over
the medium term. The lenders' power sector advances have grown at a compound annual
growth rate (CAGR) of about 31 per cent to Rs.4.8 trillion as on March 31, 2011 from Rs.1.3
trillion as on March 31, 2006.
CRISIL estimates that advances to the sector will grow further, at a CAGR of 23 per cent over
the next two years to about Rs.7.3 trillion as on March 31, 2013 (see Chart 2). The growth will
be driven primarily by the strong pipeline of undisbursed sanctions to the power sector.
Nevertheless, growth in power sector advances may moderate, given the lenders' increasing
caution in disbursing to the sector, especially to the SPUs. The banks, in particular, have
slowed down fresh sanctions to new power sector projects. The sector will also look to the
lenders to fund its ongoing investments in transmission and distribution, increasing working
capital requirements due to increased losses of distribution companies, and projects under
implementation.
Lenders' power sector exposures to increase further
Banks to remain major lenders
The share of power sector advances in the banking industry's total advances has almost
doubled to 7.3 per cent as on March 31, 2011 from 3.7 per cent as on March 31, 2008. CRISIL
estimates the banks' outstanding undisbursed sanctions as exceeding Rs.1.3 trillion as on
March 31, 2011. Disbursements from existing sanctions and conversion of non-fund exposures
to fund-based exposures may increase the share of power sector advances to about 7.8 per
cent of banks' total advances by March 31, 2013 (see Chart 3).
Chart 2: Growth trend in power sector advances
0
1
2
3
4
5
6
7
8
2006 2007 2008 2009 2010 2011 2013 (P)
As on March 31,
5 year CAGR of 31%
Chart 3: Growth in banking industry's power sector advances
4.0% 3.7% 3.8%4.8%
6.2%
7.3%7.8%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2006 2007 2008 2009 2010 2011 2013 (P)
As of March
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Power sector Advances Undisbursed sanctions Share in total advances
Undisbursed Sanctions
Rs.
Tri
llio
nR
s. T
rilli
on
Credit quality of power sector lenders - potential risks ahead
Power Sector Lenders: Will the credit quality trip?
Banks42%
Others25%
Other IFCs5%
PFC + REC28%
Chart 1: Source of borrowings by power sector as on March 31, 2011
9
Strong growth in the banks' power sector advances has resulted in a gradual increase in their
market share over the past few years; banks have a market share of about 56 per cent as on
March 31, 2011, and are expected to maintain market share over the medium term because
of the pipeline of undisbursed sanctions.
Currently, the shares of SPUs, CPUs, and private sector in the banking industry's power sector
advances are estimated at 63, 17, and 20 per cent, respectively. The share of the private sector
is low, because the numerous private sector generation projects are still in the
implementation stage and the borrowers also have access to alternate funding arrangements
such as foreign currency borrowings and buyers' credit. As project implementation gathers
pace, projects may draw on the undisbursed sanctions, and substitute non-fund-based
exposures with fund-based ones. Banks are expected to meet about three-fourths of the
private sector's incremental funding requirements. The share of funding to the private sector
is, therefore, expected to increase to about 30 per cent over the next 2 years.
Among infrastructure-financing companies, PFC and REC are key lenders to the power sector,
especially the SPUs. Their combined advances have grown at a CAGR of 24.4 per cent over the
Exposure to private sector projects to drive banks' power sector advances growth
PFC and REC to remain key lenders to SPUs
Chart 4: Trend in market share of power sector lenders
47%56% 56%
48%38% 38%
0%
20%
40%
60%
80%
100%
2006 2011 2013 (P)
As of March
Banks PFC and REC Other IFCs
past 5 years to Rs.1.8 trillion as on March 31, 2011. Their share in lending to the SPUs has,
however, reduced in recent years on account of intensifying competition from banks.
Nevertheless, CRISIL believes that PFC and REC may remain the key lenders to the SPUs, and
meet nearly half of the SPUs' incremental funding requirements by March 2013.
The gross NPAs of power sector lenders are currently negligible; the banks' gross NPAs in
power sector advances remain at less than 0.2 per cent as on March 31, 2011. PFC and REC's
gross NPAs are at 0.2 per cent and 0.3 per cent, respectively, as on June 30, 2011.
However, the lenders' asset quality remains exposed to increased systemic risks in the power
sector, especially in SPU exposures (refer to CRISIL article, 'Meaningful action on reforms
critical for health of power sector’ for details). SPUs account for nearly two-thirds of the
power sector exposure of lenders as on March 31, 2011 (see Chart 5). CRISIL has, therefore,
analysed the impact of this exposure on the lenders' asset quality.
Increasing systemic risks: A cause for worry?
Chart 5: Sector wise composition of power sector advances as on March 31, 2011
Central
15%
State
63%
Private
22%
5% 6% 6%
Credit quality of power sector lenders - potential risks ahead
Power Sector Lenders: Will the credit quality trip?
9
Strong growth in the banks' power sector advances has resulted in a gradual increase in their
market share over the past few years; banks have a market share of about 56 per cent as on
March 31, 2011, and are expected to maintain market share over the medium term because
of the pipeline of undisbursed sanctions.
Currently, the shares of SPUs, CPUs, and private sector in the banking industry's power sector
advances are estimated at 63, 17, and 20 per cent, respectively. The share of the private sector
is low, because the numerous private sector generation projects are still in the
implementation stage and the borrowers also have access to alternate funding arrangements
such as foreign currency borrowings and buyers' credit. As project implementation gathers
pace, projects may draw on the undisbursed sanctions, and substitute non-fund-based
exposures with fund-based ones. Banks are expected to meet about three-fourths of the
private sector's incremental funding requirements. The share of funding to the private sector
is, therefore, expected to increase to about 30 per cent over the next 2 years.
Among infrastructure-financing companies, PFC and REC are key lenders to the power sector,
especially the SPUs. Their combined advances have grown at a CAGR of 24.4 per cent over the
Exposure to private sector projects to drive banks' power sector advances growth
PFC and REC to remain key lenders to SPUs
Chart 4: Trend in market share of power sector lenders
47%56% 56%
48%38% 38%
0%
20%
40%
60%
80%
100%
2006 2011 2013 (P)
As of March
Banks PFC and REC Other IFCs
past 5 years to Rs.1.8 trillion as on March 31, 2011. Their share in lending to the SPUs has,
however, reduced in recent years on account of intensifying competition from banks.
Nevertheless, CRISIL believes that PFC and REC may remain the key lenders to the SPUs, and
meet nearly half of the SPUs' incremental funding requirements by March 2013.
The gross NPAs of power sector lenders are currently negligible; the banks' gross NPAs in
power sector advances remain at less than 0.2 per cent as on March 31, 2011. PFC and REC's
gross NPAs are at 0.2 per cent and 0.3 per cent, respectively, as on June 30, 2011.
However, the lenders' asset quality remains exposed to increased systemic risks in the power
sector, especially in SPU exposures (refer to CRISIL article, 'Meaningful action on reforms
critical for health of power sector’ for details). SPUs account for nearly two-thirds of the
power sector exposure of lenders as on March 31, 2011 (see Chart 5). CRISIL has, therefore,
analysed the impact of this exposure on the lenders' asset quality.
Increasing systemic risks: A cause for worry?
Chart 5: Sector wise composition of power sector advances as on March 31, 2011
Central
15%
State
63%
Private
22%
5% 6% 6%
Credit quality of power sector lenders - potential risks ahead
Power Sector Lenders: Will the credit quality trip?
11
Approach to categorising risks in power sector exposures
SPU exposuresMost SPUs have weak financial risk profiles, because of mounting losses and large debt, and
delays in receipt of subsidies from the state governments. CRISIL has undertaken a detailed
analysis, and prepared a risk matrix (see Chart 6) to ascertain the impact of SPU exposures on
lenders' asset quality.
l Given that SPUs continue to operate as an arm of, and depend on, the state governments,
for support, a two-dimensional heat map has been prepared to juxtapose the lenders'
SPU exposure against the risk clustering of state finances to arrive at the eventual risks in
the portfolio.
l The X-axis represents the risk profile of SPUs. Exposure to SPUs has been classified into
low, moderate or high risk, based on a combination of three factors: the gap between the
distribution companies' average revenue receipts (ARRs) and average cost of supply
(ACS), their aggregate technical and commercial (AT&C) losses, and outstanding debt. The
risk profiling of distribution companies is used as proxy for SPUs as a whole, given the
strong linkages among generation, transmission and distribution companies.
l The Y-axis represents the state governments' ability to support the SPUs. Based on the
health of state finances, states have been classified into four - with Cluster I denoting
highest ability, and Cluster IV, lowest ability. Clustering of the states' financial risk profiles
is based on analyses of state finances on three key parameters - fiscal management, self-
reliance, and debt-servicing ability.
The lenders' SPU exposures have, thus, been categorised into four risk categories - from low
risk to highest risk - as indicated in Table 1:
Table 1: Risk categorisation of SPU exposures
Per Cent Rs. Trillion
Highest Risk 40 1.2
High Risk 30 0.9
Moderate 20 0.6
Low 10 0.3
Total SPU exposure 100 3.0
Table 1 indicates that the lenders' exposure to the high- and highest- risk categories of SPUs is
around 70 per cent.
Additionally, private sector projects are increasingly facing challenges because of
uncertainties regarding regulatory clearances, availability of fuel, and ability to pass on rising
fuel costs (refer to CRISIL article, 'Risks related to fuel and project execution will increase
power generation costs' for details). CRISIL has, therefore, also assessed the extent of risks in
private sector projects.
Private sector exposures
Credit quality of power sector lenders - potential risks ahead
Power Sector Lenders: Will the credit quality trip?
Cluster IV(Lowest)
Himachal PradeshWest Bengal
BiharJammu & KashmirNorth Eastern States (excluding Assam)
Cluster IIIKerala
Uttarakhand
JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh
AssamOrissa
Cluster IIGoa
GujaratChhattisgarhMaharashtra
Andhra PradeshHaryanaTamil Nadu
Cluster I (Highest)
Delhi Karnataka
Low Risk Moderate Risk High Risk
Risk profile of State Power Utilities
Stat
e G
ove
rnm
ent
abili
ty t
o s
up
po
rt
Chart 6: Risk matrix of SPU exposures
Highest Risk Moderate RiskHigh Risk Low Risk
11
Approach to categorising risks in power sector exposures
SPU exposuresMost SPUs have weak financial risk profiles, because of mounting losses and large debt, and
delays in receipt of subsidies from the state governments. CRISIL has undertaken a detailed
analysis, and prepared a risk matrix (see Chart 6) to ascertain the impact of SPU exposures on
lenders' asset quality.
l Given that SPUs continue to operate as an arm of, and depend on, the state governments,
for support, a two-dimensional heat map has been prepared to juxtapose the lenders'
SPU exposure against the risk clustering of state finances to arrive at the eventual risks in
the portfolio.
l The X-axis represents the risk profile of SPUs. Exposure to SPUs has been classified into
low, moderate or high risk, based on a combination of three factors: the gap between the
distribution companies' average revenue receipts (ARRs) and average cost of supply
(ACS), their aggregate technical and commercial (AT&C) losses, and outstanding debt. The
risk profiling of distribution companies is used as proxy for SPUs as a whole, given the
strong linkages among generation, transmission and distribution companies.
l The Y-axis represents the state governments' ability to support the SPUs. Based on the
health of state finances, states have been classified into four - with Cluster I denoting
highest ability, and Cluster IV, lowest ability. Clustering of the states' financial risk profiles
is based on analyses of state finances on three key parameters - fiscal management, self-
reliance, and debt-servicing ability.
The lenders' SPU exposures have, thus, been categorised into four risk categories - from low
risk to highest risk - as indicated in Table 1:
Table 1: Risk categorisation of SPU exposures
Per Cent Rs. Trillion
Highest Risk 40 1.2
High Risk 30 0.9
Moderate 20 0.6
Low 10 0.3
Total SPU exposure 100 3.0
Table 1 indicates that the lenders' exposure to the high- and highest- risk categories of SPUs is
around 70 per cent.
Additionally, private sector projects are increasingly facing challenges because of
uncertainties regarding regulatory clearances, availability of fuel, and ability to pass on rising
fuel costs (refer to CRISIL article, 'Risks related to fuel and project execution will increase
power generation costs' for details). CRISIL has, therefore, also assessed the extent of risks in
private sector projects.
Private sector exposures
Credit quality of power sector lenders - potential risks ahead
Power Sector Lenders: Will the credit quality trip?
Cluster IV(Lowest)
Himachal PradeshWest Bengal
BiharJammu & KashmirNorth Eastern States (excluding Assam)
Cluster IIIKerala
Uttarakhand
JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh
AssamOrissa
Cluster IIGoa
GujaratChhattisgarhMaharashtra
Andhra PradeshHaryanaTamil Nadu
Cluster I (Highest)
Delhi Karnataka
Low Risk Moderate Risk High Risk
Risk profile of State Power Utilities
Stat
e G
ove
rnm
ent
abili
ty t
o s
up
po
rt
Chart 6: Risk matrix of SPU exposures
Highest Risk Moderate RiskHigh Risk Low Risk
13
Calculating exposure at risk
Base case scenario:
Stress case scenario:
Clearly, lenders will be susceptible to increased asset quality pressures over the medium term.
However, the central and state governments are undertaking reform measures, especially to
help the SPUs pass on rising costs and reduce losses. CRISIL estimates the exposure in the
lenders' (banks and NBFC-IFCs, combined) power sector portfolio as on March 31, 2011, as
susceptible to the risk of slippages to NPAs by end-March 2013, as follows (see Table 2):l Implementation of reform measures as expected by CRISIL over the
next 12 to 18 months (refer to article, 'Power distribution utilities - current issues and
what lies ahead’ for details).l No major reforms are implemented, resulting in further weakening
in the SPUs' performance
Table 2: Lenders' exposure at risk
* refer to Annexure I for the key assumptions
As Table 2 indicates, lenders to the power sector will be able to cope with increased asset
quality challenges under the base-case scenario. Their capital coverage for exposure at risk
will remain adequate at around 7.4 times.
Under the stress-case scenario, however, asset quality will be adversely impacted, with net
worth coverage for exposure at risk declining to about 4.9 times. The impact will, however,
vary from lender to lender. Banks with their diversified loan portfolio will be in a better
position to manage the impact, while specialised lenders such as PFC and REC will be more
vulnerable, given their high sectoral concentration and large exposure to weak SPUs. Under
the stress-case scenario, the specialised lenders' net worth coverage for exposure at risk is
likely to be between 1 and 2 times, and will require capital infusions to maintain adequate
coverage for increased NPAs. Hence, timeliness in the implementation of reforms will remain a
key rating monitorable for lenders to the power sector over the next 12 to 18 months.
Base Case Stress Case
Exposure at Risk *
Highest Risk (SPUs) Rs. Bn. 121 363
High Risk (SPUs) Rs. Bn. 45 91
Private Sector Rs. Bn. 53 105
Total Exposure at Risk Rs. Bn. 219 559
Total Power Sector Advances Rs. Bn. 4828 4828
Exposure at Risk Per Cent 4.5 11.6
Net Worth / Exposure At Risk Times 7.4 4.9
Annexure I
Assumptions in calculating lenders' exposure at risk
CRISIL has factored in the following percentages of lenders' SPU and private sector exposures
to be at risk:
For SPUs
Proportion of exposure at risk under
Highest risk category 10 30
High risk category 5 10
Private sector projects 5 10
Base Case Stress Case
In the case of banks, net worth / exposure at risk calculation factors in their power sector
exposure at risk and NPAs from other sectors.
In per cent
Credit quality of power sector lenders - potential risks ahead
Power Sector Lenders: Will the credit quality trip?
13
Calculating exposure at risk
Base case scenario:
Stress case scenario:
Clearly, lenders will be susceptible to increased asset quality pressures over the medium term.
However, the central and state governments are undertaking reform measures, especially to
help the SPUs pass on rising costs and reduce losses. CRISIL estimates the exposure in the
lenders' (banks and NBFC-IFCs, combined) power sector portfolio as on March 31, 2011, as
susceptible to the risk of slippages to NPAs by end-March 2013, as follows (see Table 2):l Implementation of reform measures as expected by CRISIL over the
next 12 to 18 months (refer to article, 'Power distribution utilities - current issues and
what lies ahead’ for details).l No major reforms are implemented, resulting in further weakening
in the SPUs' performance
Table 2: Lenders' exposure at risk
* refer to Annexure I for the key assumptions
As Table 2 indicates, lenders to the power sector will be able to cope with increased asset
quality challenges under the base-case scenario. Their capital coverage for exposure at risk
will remain adequate at around 7.4 times.
Under the stress-case scenario, however, asset quality will be adversely impacted, with net
worth coverage for exposure at risk declining to about 4.9 times. The impact will, however,
vary from lender to lender. Banks with their diversified loan portfolio will be in a better
position to manage the impact, while specialised lenders such as PFC and REC will be more
vulnerable, given their high sectoral concentration and large exposure to weak SPUs. Under
the stress-case scenario, the specialised lenders' net worth coverage for exposure at risk is
likely to be between 1 and 2 times, and will require capital infusions to maintain adequate
coverage for increased NPAs. Hence, timeliness in the implementation of reforms will remain a
key rating monitorable for lenders to the power sector over the next 12 to 18 months.
Base Case Stress Case
Exposure at Risk *
Highest Risk (SPUs) Rs. Bn. 121 363
High Risk (SPUs) Rs. Bn. 45 91
Private Sector Rs. Bn. 53 105
Total Exposure at Risk Rs. Bn. 219 559
Total Power Sector Advances Rs. Bn. 4828 4828
Exposure at Risk Per Cent 4.5 11.6
Net Worth / Exposure At Risk Times 7.4 4.9
Annexure I
Assumptions in calculating lenders' exposure at risk
CRISIL has factored in the following percentages of lenders' SPU and private sector exposures
to be at risk:
For SPUs
Proportion of exposure at risk under
Highest risk category 10 30
High risk category 5 10
Private sector projects 5 10
Base Case Stress Case
In the case of banks, net worth / exposure at risk calculation factors in their power sector
exposure at risk and NPAs from other sectors.
In per cent
Credit quality of power sector lenders - potential risks ahead
Power Sector Lenders: Will the credit quality trip?
15
Power distribution utilities - current issues and what lies ahead
Executive Summary
Power distribution companies' (discoms') losses have been mounting at a rapid rate. The net
losses (subsidy booked basis) are estimated to have increased from Rs.275 billion in 2009-10 to
Rs.350-400 billion in 2010-11. As per CRISIL's analysis, there are three key reasons for the
increasing losses:1 Increasing gap between average revenue realized per unit (ARR) and average cost of
supply per unit (ACS) due to inadequate and delayed tariff revision2. high, though improving, level of aggregate technical and commercial (AT&C) losses3. high and increasing levels of outstanding debt on discoms' balance sheets, resulting in
higher interest costs
On account of the emotive reaction to power tariff hikes as well as the lack of political will to
administer them, many discoms either did not file for tariff revisions or were allowed only
minimal tariff hikes by the state electricity regulatory commissions (SERCs). Most discoms
have also been unsuccessful in bringing about any meaningful reduction in AT&C losses. The
aforementioned factors, coupled with increasing power purchase costs, have led to a
widening revenue gap. The under-recoveries and inefficiencies have also led to increasing
debt levels in discoms, resulting in high interest burden and, consequently, increasing losses
for the discoms.
Profitability pressures for discoms are expected to increase further over the medium term
because of fuel-related risks, escalating capital costs, and project-related risks on the power
generation front (refer to CRISIL's opinion piece titled 'Risks related to fuel and project
execution will increase power generation costs').
The subsidies extended to the discoms by the state governments have also been delayed,
leading to the discom's increased dependence on short-term debt for funding the losses.
Large loss-funding is estimated to have taken discom debt (net of state government loans) to
around Rs.2.1 trillion as on March 31, 2011, as against Rs.1.5 trillion as on March 31, 2010. The
pressure-alleviating factor in the scenario is the 12-point resolution adopted by the state
power ministers and the tariff hikes recently announced by some states. As banks and power
financiers have begun to link disbursals with discoms' performance, the discoms are expected
to take some corrective measures in the form of tariff hikes and AT&C loss reductions higher
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
15
Power distribution utilities - current issues and what lies ahead
Executive Summary
Power distribution companies' (discoms') losses have been mounting at a rapid rate. The net
losses (subsidy booked basis) are estimated to have increased from Rs.275 billion in 2009-10 to
Rs.350-400 billion in 2010-11. As per CRISIL's analysis, there are three key reasons for the
increasing losses:1 Increasing gap between average revenue realized per unit (ARR) and average cost of
supply per unit (ACS) due to inadequate and delayed tariff revision2. high, though improving, level of aggregate technical and commercial (AT&C) losses3. high and increasing levels of outstanding debt on discoms' balance sheets, resulting in
higher interest costs
On account of the emotive reaction to power tariff hikes as well as the lack of political will to
administer them, many discoms either did not file for tariff revisions or were allowed only
minimal tariff hikes by the state electricity regulatory commissions (SERCs). Most discoms
have also been unsuccessful in bringing about any meaningful reduction in AT&C losses. The
aforementioned factors, coupled with increasing power purchase costs, have led to a
widening revenue gap. The under-recoveries and inefficiencies have also led to increasing
debt levels in discoms, resulting in high interest burden and, consequently, increasing losses
for the discoms.
Profitability pressures for discoms are expected to increase further over the medium term
because of fuel-related risks, escalating capital costs, and project-related risks on the power
generation front (refer to CRISIL's opinion piece titled 'Risks related to fuel and project
execution will increase power generation costs').
The subsidies extended to the discoms by the state governments have also been delayed,
leading to the discom's increased dependence on short-term debt for funding the losses.
Large loss-funding is estimated to have taken discom debt (net of state government loans) to
around Rs.2.1 trillion as on March 31, 2011, as against Rs.1.5 trillion as on March 31, 2010. The
pressure-alleviating factor in the scenario is the 12-point resolution adopted by the state
power ministers and the tariff hikes recently announced by some states. As banks and power
financiers have begun to link disbursals with discoms' performance, the discoms are expected
to take some corrective measures in the form of tariff hikes and AT&C loss reductions higher
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
17
than demonstrated historically. This also leads us to believe that state government's subsidy
levels will be higher than historical levels and will be disbursed in a timely manner.
Consequently, CRISIL's base case scenario expects that with adequate and timely support
from state governments, as committed in the 12 point resolution, the net losses (subsidy
booked basis) will be contained at broadly the same levels for 2011-12 and 2012-13. Even
though the rate of growth of losses will be significantly curtailed in the base case, outstanding
debt levels will still increase by more than 50 per cent from the current levels and reach Rs.3.3
trillion as on March 31, 2013.
CRISIL's analysis also reveals that without any subsidy support, discoms will need to hike
tariffs by about 47 per cent to break- even in 2011-12. Our optimistic scenario assumes
substantive increases in tariffs and reduction in AT&C losses coupled with even higher support
from state governments (compared to our base case). Our worst case scenario assumes status
quo on all the above counts. The worst case scenario will result in annual net losses (subsidy
booked basis) increasing to around Rs.600 billion by 2012-13.
The situation is not uniformly bad across the entire power distribution sector; nine states of
Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh (UP), Madhya Pradesh (MP),
Jharkhand, and Andhra Pradesh (AP) account for the bulk of the problem in the sector. The
combined losses of discoms in these nine states constitute 85 per cent of the total distribution
sector losses and the combined debt of the discoms in these states constitutes nearly 80 per
cent of the all India discom debt.
CRISIL believes that the discoms will continue to be the weakest link in the power value chain.
While the efforts by state governments and ministry of power are a meaningful and concerted
attempt at addressing the issues that have been bogging down the power distribution sector,
it is the seriousness and urgency with which the proposed measures are implemented, which
will be crucial.
CRISIL's study covers 57 discoms and integrated power utilities selling directly to consumers
across 30 states and union territories in India.
Scope of the study
Losses mounting at a rapid rate, estimated in the range of Rs.350 - 400 billion for 2010-11
At an aggregate level, net losses (subsidy booked basis) of discoms increased at a compound
annual growth rate (CAGR) of 24 per cent between 2006-07 and 2009-10 to reach Rs.275
billion (refer to Chart 1). CRISIL estimates net losses subsidy booked basis, in the range of Rs.
350 - 400 billion for 2010-11.
The three main reasons for increasing losses of the discom sector are: 1. Increasing levels of ARR-ACS gap due to inadequate and delayed tariff revision2. high, though improving, level of AT&C losses3. high and increasing levels of outstanding debt, resulting in higher interest costs
We discuss the three key contributors to the losses in greater detail:
1. Increasing ARR-ACS gap due to delayed and inadequate tariff revision
2The gap (without subsidy) increased from Rs.0.49/kilowatt-hour (kwh) in 2006-07 to
Rs.0.86/kwh in 2009-10 (refer to Chart 2).
The upward trajectory of gap per unit is explained by the fact that while power procurement
cost and wage bills - together both these cost heads account for 82 per cent of the discoms'
costs (refer to Chart 3) - were increasing, lack of political will to revise tariffs resulted in growth
rate of ACS outpacing the rate at which ARR increased. Between 2006-07 and 2009-10, the
cost of procuring power and wage bills per unit increased by 10 per cent each, resulting in ACS
growth of 9 per cent.
Power distribution utilities - current issues and what lies ahead
Power Sector Lenders: Will the credit quality trip?
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Chart 1: Discom’s Losses
(650)
(500)
(350)
(200)
(50)
2006-07 2007-08 2008-09 2009-10
(Rs. Billion)Net Losses (without subsidy) Net Losses (subsidy booked basis)
Net Losses (subsidy received basis)
17
than demonstrated historically. This also leads us to believe that state government's subsidy
levels will be higher than historical levels and will be disbursed in a timely manner.
Consequently, CRISIL's base case scenario expects that with adequate and timely support
from state governments, as committed in the 12 point resolution, the net losses (subsidy
booked basis) will be contained at broadly the same levels for 2011-12 and 2012-13. Even
though the rate of growth of losses will be significantly curtailed in the base case, outstanding
debt levels will still increase by more than 50 per cent from the current levels and reach Rs.3.3
trillion as on March 31, 2013.
CRISIL's analysis also reveals that without any subsidy support, discoms will need to hike
tariffs by about 47 per cent to break- even in 2011-12. Our optimistic scenario assumes
substantive increases in tariffs and reduction in AT&C losses coupled with even higher support
from state governments (compared to our base case). Our worst case scenario assumes status
quo on all the above counts. The worst case scenario will result in annual net losses (subsidy
booked basis) increasing to around Rs.600 billion by 2012-13.
The situation is not uniformly bad across the entire power distribution sector; nine states of
Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh (UP), Madhya Pradesh (MP),
Jharkhand, and Andhra Pradesh (AP) account for the bulk of the problem in the sector. The
combined losses of discoms in these nine states constitute 85 per cent of the total distribution
sector losses and the combined debt of the discoms in these states constitutes nearly 80 per
cent of the all India discom debt.
CRISIL believes that the discoms will continue to be the weakest link in the power value chain.
While the efforts by state governments and ministry of power are a meaningful and concerted
attempt at addressing the issues that have been bogging down the power distribution sector,
it is the seriousness and urgency with which the proposed measures are implemented, which
will be crucial.
CRISIL's study covers 57 discoms and integrated power utilities selling directly to consumers
across 30 states and union territories in India.
Scope of the study
Losses mounting at a rapid rate, estimated in the range of Rs.350 - 400 billion for 2010-11
At an aggregate level, net losses (subsidy booked basis) of discoms increased at a compound
annual growth rate (CAGR) of 24 per cent between 2006-07 and 2009-10 to reach Rs.275
billion (refer to Chart 1). CRISIL estimates net losses subsidy booked basis, in the range of Rs.
350 - 400 billion for 2010-11.
The three main reasons for increasing losses of the discom sector are: 1. Increasing levels of ARR-ACS gap due to inadequate and delayed tariff revision2. high, though improving, level of AT&C losses3. high and increasing levels of outstanding debt, resulting in higher interest costs
We discuss the three key contributors to the losses in greater detail:
1. Increasing ARR-ACS gap due to delayed and inadequate tariff revision
2The gap (without subsidy) increased from Rs.0.49/kilowatt-hour (kwh) in 2006-07 to
Rs.0.86/kwh in 2009-10 (refer to Chart 2).
The upward trajectory of gap per unit is explained by the fact that while power procurement
cost and wage bills - together both these cost heads account for 82 per cent of the discoms'
costs (refer to Chart 3) - were increasing, lack of political will to revise tariffs resulted in growth
rate of ACS outpacing the rate at which ARR increased. Between 2006-07 and 2009-10, the
cost of procuring power and wage bills per unit increased by 10 per cent each, resulting in ACS
growth of 9 per cent.
Power distribution utilities - current issues and what lies ahead
Power Sector Lenders: Will the credit quality trip?
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Chart 1: Discom’s Losses
(650)
(500)
(350)
(200)
(50)
2006-07 2007-08 2008-09 2009-10
(Rs. Billion)Net Losses (without subsidy) Net Losses (subsidy booked basis)
Net Losses (subsidy received basis)
Note: Gap = Average Cost of Supply – Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total
Revenue/Net Input EnergySource: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
19
On the other hand, tariff hikes have been few and far between and insufficient to meet the
revenue gap in most cases; in some states no tariff revision has been implemented for years,
as evident from the ARR CAGR of only about 6 per cent between 2006-07 and 2009-10. In
most states, ARR petitions have not been filed in a timely manner and there is a substantial
time lag between successive revisions of tariff. For instance, Tamil Nadu announced a tariff
hike after a gap of seven years in 2010-11, that too in small measure; other states, including
Rajasthan, have announced a tariff increase for 2011-12 for the first time since 2005. In 2011-
12, some of the SERCs have announced tariff hikes; but in most cases, these will only partly
fund the revenue gaps. In fact, in most cases, tariff hikes allowed by SERCs are far lower than
the hikes petitioned for by the discoms (refer to Annexure I for details of recent tariff hikes in
some states).
The problem of under-recovery of ACS is exacerbated by the cross-subsidisation of cheap
power to the agriculture sector through differential tariffs for the domestic, commercial and
industrial consumer segments. In 2009-10, agriculture accounted for nearly 23 per cent of the
total power consumption in India (refer to Chart 4) but the revenue from sale of power to this
segment was only 6 per cent. This translated into an average tariff realisation of merely
Power distribution utilities - current issues and what lies ahead
Rs.0.89/kwh from the agriculture sector, against the tariff realisation of Rs.5.57/kwh,
Rs.4.48/kwh and Rs.2.64/kwh from commercial, industrial-high tension and domestic
consumer categories respectively. High consumption of power by the agriculture consumer
category, which continues to be highly subsidised in most states, makes it difficult to recoup
the entire revenue loss from other consumer categories. This issue is most glaring in Tamil
Nadu, Rajasthan and Punjab. Tamil Nadu, for instance, has modest AT&C loss of around 20 per
cent, which is significantly lower than the all-India median; but nearly 21 per cent of the
power sold in the state is to the subsidised agriculture consumer segment, resulting in a gap
(without subsidy) of Rs.1.61 per unit. The tariff recovery from other user segments is not
sufficient to cross-subsidise the free power sold to agriculture.
Chart 2: Widening Gap of Discoms Chart 3: Cost-wise break-up of ACS (2009-10)
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Power Sector Lenders: Will the credit quality trip?
1 Gap = Average Cost of Supply Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total Revenue/Net Input Energy
1 Gap = Average Cost of Supply Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total Revenue/Net Input Energy
2.39
3.41
2.93
2.76
3.54
2.62
2.27
2.68
2.00
2.50
3.00
3.50
2006-07 2007-08 2008-09 2009-10
(Rs./kwh)
Avg Cost of Supply (ACS) Average Revenue Realised [without subsidy] (ARR)
2.68
0.863.54
2.61
0.350.22
0.130.19
0.11
Power
Purchase
Wages Interest Generation Admin+Misc.
Expenses
Depreciation ACS ARR GAP
72% 10% 4%6% 3% 100%5%
(Rs./kwh)
Note: Gap = Average Cost of Supply – Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total
Revenue/Net Input EnergySource: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
19
On the other hand, tariff hikes have been few and far between and insufficient to meet the
revenue gap in most cases; in some states no tariff revision has been implemented for years,
as evident from the ARR CAGR of only about 6 per cent between 2006-07 and 2009-10. In
most states, ARR petitions have not been filed in a timely manner and there is a substantial
time lag between successive revisions of tariff. For instance, Tamil Nadu announced a tariff
hike after a gap of seven years in 2010-11, that too in small measure; other states, including
Rajasthan, have announced a tariff increase for 2011-12 for the first time since 2005. In 2011-
12, some of the SERCs have announced tariff hikes; but in most cases, these will only partly
fund the revenue gaps. In fact, in most cases, tariff hikes allowed by SERCs are far lower than
the hikes petitioned for by the discoms (refer to Annexure I for details of recent tariff hikes in
some states).
The problem of under-recovery of ACS is exacerbated by the cross-subsidisation of cheap
power to the agriculture sector through differential tariffs for the domestic, commercial and
industrial consumer segments. In 2009-10, agriculture accounted for nearly 23 per cent of the
total power consumption in India (refer to Chart 4) but the revenue from sale of power to this
segment was only 6 per cent. This translated into an average tariff realisation of merely
Power distribution utilities - current issues and what lies ahead
Rs.0.89/kwh from the agriculture sector, against the tariff realisation of Rs.5.57/kwh,
Rs.4.48/kwh and Rs.2.64/kwh from commercial, industrial-high tension and domestic
consumer categories respectively. High consumption of power by the agriculture consumer
category, which continues to be highly subsidised in most states, makes it difficult to recoup
the entire revenue loss from other consumer categories. This issue is most glaring in Tamil
Nadu, Rajasthan and Punjab. Tamil Nadu, for instance, has modest AT&C loss of around 20 per
cent, which is significantly lower than the all-India median; but nearly 21 per cent of the
power sold in the state is to the subsidised agriculture consumer segment, resulting in a gap
(without subsidy) of Rs.1.61 per unit. The tariff recovery from other user segments is not
sufficient to cross-subsidise the free power sold to agriculture.
Chart 2: Widening Gap of Discoms Chart 3: Cost-wise break-up of ACS (2009-10)
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Power Sector Lenders: Will the credit quality trip?
1 Gap = Average Cost of Supply Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total Revenue/Net Input Energy
1 Gap = Average Cost of Supply Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total Revenue/Net Input Energy
2.39
3.41
2.93
2.76
3.54
2.62
2.27
2.68
2.00
2.50
3.00
3.50
2006-07 2007-08 2008-09 2009-10
(Rs./kwh)
Avg Cost of Supply (ACS) Average Revenue Realised [without subsidy] (ARR)
2.68
0.863.54
2.61
0.350.22
0.130.19
0.11
Power
Purchase
Wages Interest Generation Admin+Misc.
Expenses
Depreciation ACS ARR GAP
72% 10% 4%6% 3% 100%5%
(Rs./kwh)
21
2. High level of AT&C losses
Faulty infrastructure and poor collection efficiency due to theft and un-metered connections
are also to be blamed for the losses in the sector. AT&C loss level in the sector was 27.2 per
cent in 2009-10 and was a substantial contributor to the overall net losses. Even though AT&C
losses have improved marginally to 27.2 per cent in 2009-10 from 30.6 per cent in 2006-07, at
an all-India level (refer to Chart 5), there is much to be desired in efficiency improvement and
infrastructure upgrade. While commercial losses were 4.2 per cent of net input energy, the
transmission and distribution (T&D) losses (units unbilled) were much higher at 23 per cent in
2009-10.
Power distribution utilities - current issues and what lies ahead
The resultant impact of under-recoveries and inefficiencies of the distribution sector is that
discoms' losses have increased significantly, their capital structures are in disarray, and the net
worth of many discoms has eroded.
The debt levels for discoms have increased by 20 per cent CAGR between 2006-07 and 2009-
10, with total outstanding debt of discoms at Rs.1768 billion as on March 31, 2010 (refer to
Chart 6). Of this, State Government loans were Rs.294 billion. The increase in debt levels has
resulted in a corresponding increase in interest burden. Of the 57 discoms that CRISIL has
analysed, 29 had negative net worths. Some states, including Delhi and West Bengal, took
steps and recapitalised their discoms in the past. We estimate that the debt levels (net of state
government loans) have increased to Rs.2.1 trillion as on March 31, 2011.
Due to large loss-funding, discom debt (net of state government loans) is estimated at
around Rs.3.3 trillion as on March 31, 2013
CRISIL's base case assumptions are as follows: l Power purchase cost, the single largest cost head for discoms, is the key contributor to the
increase in ACS. CRISIL's analysis of generation cost trends in India suggests that cost of
3. High debt level and interest costsChart 4: Consumer category-wise power consumption and revenues 2009-10
Chart 5: Increasing input energy (MU) and high AT&C losses (%)
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Chart 6: Rising debt levels… …Interest cost burden of Discoms
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Power Sector Lenders: Will the credit quality trip?
30.6%29.6%
27.7%
27.2%
0.15
0.2
0.25
0.3
0.35
0
100
200
300
400
500
600
700
800
2006-07 2007-08 2008-09 2009-10
(Billion Units)
Net Input Energy (LHS) Energy Sold (LHS) AT&C Losses in % (RHS)
200
400
600800
1,000
1,200
1,400
2,000
1,600
1,800
2007 2008 2009 2010
State Govt Loans Banks/FIs/Bonds
60 80 100 120 140 160
2007
2008
2009
2010
Interest cost
23%
26%36%
24%
20%
23%6%
8%
10%
8%
14%
2% 3%
Units Sold Revenues from Sale of Power
Bulk supply
Public water works
Railway
Interstate
Commercial
Industrial LT
Agriculture
Domestic
Industrial HT
(Rs. Billion)
21
2. High level of AT&C losses
Faulty infrastructure and poor collection efficiency due to theft and un-metered connections
are also to be blamed for the losses in the sector. AT&C loss level in the sector was 27.2 per
cent in 2009-10 and was a substantial contributor to the overall net losses. Even though AT&C
losses have improved marginally to 27.2 per cent in 2009-10 from 30.6 per cent in 2006-07, at
an all-India level (refer to Chart 5), there is much to be desired in efficiency improvement and
infrastructure upgrade. While commercial losses were 4.2 per cent of net input energy, the
transmission and distribution (T&D) losses (units unbilled) were much higher at 23 per cent in
2009-10.
Power distribution utilities - current issues and what lies ahead
The resultant impact of under-recoveries and inefficiencies of the distribution sector is that
discoms' losses have increased significantly, their capital structures are in disarray, and the net
worth of many discoms has eroded.
The debt levels for discoms have increased by 20 per cent CAGR between 2006-07 and 2009-
10, with total outstanding debt of discoms at Rs.1768 billion as on March 31, 2010 (refer to
Chart 6). Of this, State Government loans were Rs.294 billion. The increase in debt levels has
resulted in a corresponding increase in interest burden. Of the 57 discoms that CRISIL has
analysed, 29 had negative net worths. Some states, including Delhi and West Bengal, took
steps and recapitalised their discoms in the past. We estimate that the debt levels (net of state
government loans) have increased to Rs.2.1 trillion as on March 31, 2011.
Due to large loss-funding, discom debt (net of state government loans) is estimated at
around Rs.3.3 trillion as on March 31, 2013
CRISIL's base case assumptions are as follows: l Power purchase cost, the single largest cost head for discoms, is the key contributor to the
increase in ACS. CRISIL's analysis of generation cost trends in India suggests that cost of
3. High debt level and interest costsChart 4: Consumer category-wise power consumption and revenues 2009-10
Chart 5: Increasing input energy (MU) and high AT&C losses (%)
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Chart 6: Rising debt levels… …Interest cost burden of Discoms
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Power Sector Lenders: Will the credit quality trip?
30.6%29.6%
27.7%
27.2%
0.15
0.2
0.25
0.3
0.35
0
100
200
300
400
500
600
700
800
2006-07 2007-08 2008-09 2009-10
(Billion Units)
Net Input Energy (LHS) Energy Sold (LHS) AT&C Losses in % (RHS)
200
400
600800
1,000
1,200
1,400
2,000
1,600
1,800
2007 2008 2009 2010
State Govt Loans Banks/FIs/Bonds
60 80 100 120 140 160
2007
2008
2009
2010
Interest cost
23%
26%36%
24%
20%
23%6%
8%
10%
8%
14%
2% 3%
Units Sold Revenues from Sale of Power
Bulk supply
Public water works
Railway
Interstate
Commercial
Industrial LT
Agriculture
Domestic
Industrial HT
(Rs. Billion)
generation is likely to witness a 10-12 per cent growth between 2011-12 and 2012-13.
This cost increase is on account of escalation in fuel cost and increase in capital costs. l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes and curtailed
lending by banks.l Reduction of AT&C losses taking benefit of the Restructured Accelerated Power
Development & Reform Programme (R-APDRP). l State government subsidy to increase, given the fact that funding from banks and
financial institutions will not be available for weaker discoms, compelling the
governments to bridge the gap.
As per CRISIL's base case, the net loss (subsidy booked basis) will be contained at broadly the
same levels for 2011-12 and 2012-13. Even though the rate of growth of losses will be
significantly curtailed in the base case, outstanding debt levels will still increase by 25 per cent
per annum from the current levels and reach Rs.3.3 trillion by March 31, 2013. A large
portion of the incremental debt contracted by discoms will go towards loss-funding and
therefore will further add to the inefficiencies of the sector.
CRISIL's analysis reveals that discoms need to implement a 47 per cent tariff hike to attain
break-even in operations in 2011-12. Once the rate of increase in losses is arrested, the
discoms can begin to reduce their outstanding debt and deploy funds to address systemic
issues. However, 47 per cent tariff hikes may be difficult to implement because of political
compulsions. Therefore, CRISIL's optimistic case assumes significant tariff hikes in 2011-12
and 2012-13 along with increased state government support. On the other hand our
pessimistic scenario assumes status quo on all counts and highlights the importance of urgent
action. The worst case scenario will result in annual net losses (subsidy booked basis)
increasing to around Rs.600 billion by 2012-13.
CRISIL has analysed the credit risk profiles of discoms on their ARR-ACS gap, AT&C losses and
outstanding debt levels (refer Chart 7). The bubble graph plots the 15 most leveraged states
on these three key parameters, as CRISIL believes that these parameters adequately capture
the credit risk profiles of the discoms. These 15 states, along with Chhattisgarh, Orissa,
Discoms need to hike tariffs by 47 per cent to break-even in 2011-12
Few states account for bulk of the problem
23
Power distribution utilities - current issues and what lies ahead
Kerala, Uttarakhand and Jammu & Kashmir, are also amongst the top 20 energy-consuming
states in India.
l As is evident, the nine states, Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar
Pradesh, Madhya Pradesh, Jharkhand and Andhra Pradesh that feature in quadrant III and
IV account for the bulk of the power distribution sector problems and are the most
vulnerable from credit risk perspective. The discoms of these states are amongst the
highest loss-making discoms, with the most leveraged capital structures. Their net losses
(subsidy booked basis) accounted for about 85 per cent of the sector-wide losses.
Similarly, almost 80 per cent of the entire discom sector debt is concentrated in the
discoms of these states; the aggregate debt of the discoms of these states was more than
Rs.1.4 trillion as on March 31, 2010.
Power Sector Lenders: Will the credit quality trip?
Chart 7: Top 15 States by outstanding debt (~96% of Discom Debt) Discom profile of states
Note: 1. Outstanding debt includes state government loans. 2. Tamil Nadu, Punjab and Bihar were not unbundled as on March 31, 2010. The debt figures for these 3 states includes debt for
transmission and generation arms of the respective states also. Tamil Nadu and Punjab have been subsequently unbundled in
2010-11.Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
High Risk States
Low Risk States
Moderate Risk States
TN, 320
Rajasthan, 329
Punjab, 173
Bihar, 126
AP, 129
Haryana, 118
WB, 49
Jharkhand, 71
MP, 89
UP, 60
Mah.,66
Delhi, 60
Ktk, 40
Guj., 28
HP, 40
5%
15%
25%
35%
45%
0.35 0.15 0.65 1.15 1.65 2.15 2.65
Gap (Rs./kwh)
Outstanding Debt as on March 31, 2010 in Rs. Billion
AT&C Losses (%)
IVII
IIII
generation is likely to witness a 10-12 per cent growth between 2011-12 and 2012-13.
This cost increase is on account of escalation in fuel cost and increase in capital costs. l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes and curtailed
lending by banks.l Reduction of AT&C losses taking benefit of the Restructured Accelerated Power
Development & Reform Programme (R-APDRP). l State government subsidy to increase, given the fact that funding from banks and
financial institutions will not be available for weaker discoms, compelling the
governments to bridge the gap.
As per CRISIL's base case, the net loss (subsidy booked basis) will be contained at broadly the
same levels for 2011-12 and 2012-13. Even though the rate of growth of losses will be
significantly curtailed in the base case, outstanding debt levels will still increase by 25 per cent
per annum from the current levels and reach Rs.3.3 trillion by March 31, 2013. A large
portion of the incremental debt contracted by discoms will go towards loss-funding and
therefore will further add to the inefficiencies of the sector.
CRISIL's analysis reveals that discoms need to implement a 47 per cent tariff hike to attain
break-even in operations in 2011-12. Once the rate of increase in losses is arrested, the
discoms can begin to reduce their outstanding debt and deploy funds to address systemic
issues. However, 47 per cent tariff hikes may be difficult to implement because of political
compulsions. Therefore, CRISIL's optimistic case assumes significant tariff hikes in 2011-12
and 2012-13 along with increased state government support. On the other hand our
pessimistic scenario assumes status quo on all counts and highlights the importance of urgent
action. The worst case scenario will result in annual net losses (subsidy booked basis)
increasing to around Rs.600 billion by 2012-13.
CRISIL has analysed the credit risk profiles of discoms on their ARR-ACS gap, AT&C losses and
outstanding debt levels (refer Chart 7). The bubble graph plots the 15 most leveraged states
on these three key parameters, as CRISIL believes that these parameters adequately capture
the credit risk profiles of the discoms. These 15 states, along with Chhattisgarh, Orissa,
Discoms need to hike tariffs by 47 per cent to break-even in 2011-12
Few states account for bulk of the problem
23
Power distribution utilities - current issues and what lies ahead
Kerala, Uttarakhand and Jammu & Kashmir, are also amongst the top 20 energy-consuming
states in India.
l As is evident, the nine states, Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar
Pradesh, Madhya Pradesh, Jharkhand and Andhra Pradesh that feature in quadrant III and
IV account for the bulk of the power distribution sector problems and are the most
vulnerable from credit risk perspective. The discoms of these states are amongst the
highest loss-making discoms, with the most leveraged capital structures. Their net losses
(subsidy booked basis) accounted for about 85 per cent of the sector-wide losses.
Similarly, almost 80 per cent of the entire discom sector debt is concentrated in the
discoms of these states; the aggregate debt of the discoms of these states was more than
Rs.1.4 trillion as on March 31, 2010.
Power Sector Lenders: Will the credit quality trip?
Chart 7: Top 15 States by outstanding debt (~96% of Discom Debt) Discom profile of states
Note: 1. Outstanding debt includes state government loans. 2. Tamil Nadu, Punjab and Bihar were not unbundled as on March 31, 2010. The debt figures for these 3 states includes debt for
transmission and generation arms of the respective states also. Tamil Nadu and Punjab have been subsequently unbundled in
2010-11.Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
High Risk States
Low Risk States
Moderate Risk States
TN, 320
Rajasthan, 329
Punjab, 173
Bihar, 126
AP, 129
Haryana, 118
WB, 49
Jharkhand, 71
MP, 89
UP, 60
Mah.,66
Delhi, 60
Ktk, 40
Guj., 28
HP, 40
5%
15%
25%
35%
45%
0.35 0.15 0.65 1.15 1.65 2.15 2.65
Gap (Rs./kwh)
Outstanding Debt as on March 31, 2010 in Rs. Billion
AT&C Losses (%)
IVII
IIII
25
Power distribution utilities - current issues and what lies ahead
l The states featuring in Quadrant IV have high ARR-ACS gap and need to significantly bring
down their AT&C losses to bring about any meaningful improvement in their financial
profiles. However, within this quadrant, it is Rajasthan which could face the most distress
in view of its high debt levels. Bihar is plagued with high AT&C losses and has substantial
ARR-ACS gap. Also, its operations were not unbundled (as on March 31, 2010) and
therefore it has large outstanding debt. These states will have to implement significant
tariff hikes in tandem with steps to bring down AT&C losses for any sustainable
improvement in their financial profile.l The entities in quadrant III have lower AT&C loss levels than those in Quadrant IV, but in
view of their high levels of ARR-ACS gap and large debt levels in Tamil Nadu, AP and
Punjab, the risks remain high. The high debt levels in Tamil Nadu and Punjab are also
because of the bundled status of their operations on March 31, 2010, coupled with the
issue of high cross-subsidy for agriculture consumers. l Quadrant II entities such as Maharashtra face moderate risks from a credit stand point. In
case of Karnataka, the ARR-ACS gap is Rs.0.43/kwh while in case of Maharashtra, the gap is
only Rs.0.24. Both these states, however, have scope for improvement in AT&C, which
could aid in further improving their financial profiles. West Bengal has introduced
monthly variable cost adjustment that is intended to pass on any fuel hikes to customers.l Quadrant I discoms are the least vulnerable entities. The entities in Quadrant I Gujarat,
Delhi and Himachal Pradesh all have low levels of losses, and therefore their debt levels,
relative to their scale of operations, are manageable. Some of the states in quadrant I, for
instance, Delhi have witnessed widening gap from 2008-09 onwards. Delhi has, however,
recently announced a substantial tariff hike of 22 per cent. While the tariff hike is short of
the tariff petition filed by the discoms, the Delhi Electricity Regulatory Commission has
committed for similar hikes under multi-year tariff regime. Such measures are likely to
keep states in quadrant I in the least-vulnerable category.
State governments' ability to support the discoms vary
The adoption of an expansionary fiscal policy, implementation of pay commission
recommendations, coupled with the global economic slowdown, resulted in deterioration in
the key fiscal indicators at the state level in 2008-09 and 2009-10. The re-emergence of a
revenue deficit (RD) after three years and high capital outlay led to increase in gross fiscal
deficit (GFD) to gross state domestic product (GSDP) ratio across states in 2009-10. The states,
on a consolidated basis, reported RD of Rs.47 billion in 2009-10 (0.7 per cent of GDSP), as
against revenue surplus of Rs.13 billion (0.2 per cent of GSDP) in 2008-09, whereas the GFD
increased to Rs.216 billion (3.3 per cent of GSDP) in 2009-10 from Rs.135 billion (2.4 per cent
of GSDP) in 2008-09.
The aggregate power subsidies increased at a CAGR of about 36 per cent between 2006-07
and 2009-10. Delay in subsidy receipts from state governments began in 2008-09, when
nearly 46 per cent of the subsidy due to discoms from state governments was not received,
leading to an increased dependence on short-term loans for funding the losses (refer to Chart
8). Similar trend continued in 2009-10.
Healthy tax revenues (driven by continued economic growth), likelihood of adhering to strong
financial discipline parameters, and higher devolution of central tax revenues among states
Power Sector Lenders: Will the credit quality trip?
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Chart 8: Trend of subsidy booked versus subsidy received
0
50
100
150
200
250
300
350
400
(Rs.
Bill
ion
)
44% of the
subsidy booked
was not received
in 2009-10
2006-07 2007-08 2008-09 2009-10
Subsidy Booked Subsidy Received
25
Power distribution utilities - current issues and what lies ahead
l The states featuring in Quadrant IV have high ARR-ACS gap and need to significantly bring
down their AT&C losses to bring about any meaningful improvement in their financial
profiles. However, within this quadrant, it is Rajasthan which could face the most distress
in view of its high debt levels. Bihar is plagued with high AT&C losses and has substantial
ARR-ACS gap. Also, its operations were not unbundled (as on March 31, 2010) and
therefore it has large outstanding debt. These states will have to implement significant
tariff hikes in tandem with steps to bring down AT&C losses for any sustainable
improvement in their financial profile.l The entities in quadrant III have lower AT&C loss levels than those in Quadrant IV, but in
view of their high levels of ARR-ACS gap and large debt levels in Tamil Nadu, AP and
Punjab, the risks remain high. The high debt levels in Tamil Nadu and Punjab are also
because of the bundled status of their operations on March 31, 2010, coupled with the
issue of high cross-subsidy for agriculture consumers. l Quadrant II entities such as Maharashtra face moderate risks from a credit stand point. In
case of Karnataka, the ARR-ACS gap is Rs.0.43/kwh while in case of Maharashtra, the gap is
only Rs.0.24. Both these states, however, have scope for improvement in AT&C, which
could aid in further improving their financial profiles. West Bengal has introduced
monthly variable cost adjustment that is intended to pass on any fuel hikes to customers.l Quadrant I discoms are the least vulnerable entities. The entities in Quadrant I Gujarat,
Delhi and Himachal Pradesh all have low levels of losses, and therefore their debt levels,
relative to their scale of operations, are manageable. Some of the states in quadrant I, for
instance, Delhi have witnessed widening gap from 2008-09 onwards. Delhi has, however,
recently announced a substantial tariff hike of 22 per cent. While the tariff hike is short of
the tariff petition filed by the discoms, the Delhi Electricity Regulatory Commission has
committed for similar hikes under multi-year tariff regime. Such measures are likely to
keep states in quadrant I in the least-vulnerable category.
State governments' ability to support the discoms vary
The adoption of an expansionary fiscal policy, implementation of pay commission
recommendations, coupled with the global economic slowdown, resulted in deterioration in
the key fiscal indicators at the state level in 2008-09 and 2009-10. The re-emergence of a
revenue deficit (RD) after three years and high capital outlay led to increase in gross fiscal
deficit (GFD) to gross state domestic product (GSDP) ratio across states in 2009-10. The states,
on a consolidated basis, reported RD of Rs.47 billion in 2009-10 (0.7 per cent of GDSP), as
against revenue surplus of Rs.13 billion (0.2 per cent of GSDP) in 2008-09, whereas the GFD
increased to Rs.216 billion (3.3 per cent of GSDP) in 2009-10 from Rs.135 billion (2.4 per cent
of GSDP) in 2008-09.
The aggregate power subsidies increased at a CAGR of about 36 per cent between 2006-07
and 2009-10. Delay in subsidy receipts from state governments began in 2008-09, when
nearly 46 per cent of the subsidy due to discoms from state governments was not received,
leading to an increased dependence on short-term loans for funding the losses (refer to Chart
8). Similar trend continued in 2009-10.
Healthy tax revenues (driven by continued economic growth), likelihood of adhering to strong
financial discipline parameters, and higher devolution of central tax revenues among states
Power Sector Lenders: Will the credit quality trip?
Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis
Chart 8: Trend of subsidy booked versus subsidy received
0
50
100
150
200
250
300
350
400
(Rs.
Bill
ion
)
44% of the
subsidy booked
was not received
in 2009-10
2006-07 2007-08 2008-09 2009-10
Subsidy Booked Subsidy Received
27
Power distribution utilities - current issues and what lies ahead
recommended by the Thirteenth Finance Commission, are likely to support the state finances,
mounting losses and increasing support required by state power utilities (including discoms)
could significantly constrain the state finances over the near to medium term.
Based on the analysis of states' financial profiles, CRISIL has grouped state governments into
four risk clusters (refer to Table 1). The states in Cluster I have the lowest risk, while those in
Cluster IV are the most vulnerable. Thus, the states which are already saddled with their own
debt and in clusters III and IV might not be in a position to further support their discoms in
distress situation.
CRISIL believes that the 12-point resolution adopted by the state power ministers and recent
tariff hikes announced by some states will ensure that losses are at least contained at current
levels, if not completely wiped out. Over the past three months, at least five states have
announced tariff hikes for the year 2011-12. While these tariff hikes fall short of the required
increase to bridge the losses, some states have announced hikes, though after long gaps,
which is an encouraging sign. CRISIL believes that such hikes will have to continue over the
medium term, despite political compulsions, in order to bridge the large revenue gap. At the
same time, state government support, in the form of timely and increased subsidy disbursal,
will have to materialise to address the funding requirements. While the efforts by state
governments and ministry of power are a meaningful and concerted attempt at addressing
the concerns that have been bogging down the power distribution sector, it is the seriousness
and urgency with which the proposed measures are implemented which will be crucial.
Conclusion
Table 1: Risk Clustering of State Governments
Karnataka, DelhiCluster I (Highest ability to support)
Gujarat, Maharashtra, Andhra Pradesh, Haryana, Tamil Nadu, Chhatisgarh, GoaCluster II
Uttar Pradesh, Madhya Pradesh, Jharkhand, Punjab, Rajasthan, Puducherry, Orissa, Kerala, Assam, Uttarakhand
Cluster III
Himachal Pradesh, West Bengal, Bihar, Sikkim, Arunachal Pradesh, Meghalaya, Tripura, Jammu & Kashmir, Manipur, Nagaland, Mizoram
Cluster IV (Lowest ability to suppport)
Parameters States
Power Sector Lenders: Will the credit quality trip?
Annexure I
Annexure II
Status of Latest Tariff Hikes in Select States
Financial Metrics for Risk Clustering of State Governments
State Tariff Hikes Remarks
Andhra Pradesh 2% Only tariff for domestic and industry consumers increased.
Delhi 22% Tariff hikes across consumer categories
Gujarat 2.6-4.7% Tariff hikes across consumer categories
Jharkhand 16.50% Tariff hikes across consumer categories
Maharashtra 17% Tariff hikes across consumer categories
Orissa 20%
Punjab 7-12% Last hike in 2010. But varrying hikes for consumers categories.
Rajasthan 15-30% Across categories. Tariff hike after 2005.
Tamil Nadu 3% Tariff Hike after 7 years and only for domestic consumers
Bihar 19% Tariff hike petitioned by board was 65%
West Bengal
Source: SERCs, CRISIL Analysis
Introduction of monthly variable cost adjustment
Parameters Financial Ratios Analysed
Fiscal Management Revenue Deficit/Revenue Receipt (RR)
Gross Fiscal Deficit (GFD)/Gross State Domestic Product (GSDP)
Capital Outlay/GSDP
Non-Developmental Revenue Expenditure/RR
Self Reliance State's Own Tax Revenues/GSDPCentral Devolutions/RR
Own Revenues/Revenue Expenditure
Debt Servicing Capability (Debt+Guarantees)/GSDP
(Debt+Guarantees)/RR
RR/Interest
27
Power distribution utilities - current issues and what lies ahead
recommended by the Thirteenth Finance Commission, are likely to support the state finances,
mounting losses and increasing support required by state power utilities (including discoms)
could significantly constrain the state finances over the near to medium term.
Based on the analysis of states' financial profiles, CRISIL has grouped state governments into
four risk clusters (refer to Table 1). The states in Cluster I have the lowest risk, while those in
Cluster IV are the most vulnerable. Thus, the states which are already saddled with their own
debt and in clusters III and IV might not be in a position to further support their discoms in
distress situation.
CRISIL believes that the 12-point resolution adopted by the state power ministers and recent
tariff hikes announced by some states will ensure that losses are at least contained at current
levels, if not completely wiped out. Over the past three months, at least five states have
announced tariff hikes for the year 2011-12. While these tariff hikes fall short of the required
increase to bridge the losses, some states have announced hikes, though after long gaps,
which is an encouraging sign. CRISIL believes that such hikes will have to continue over the
medium term, despite political compulsions, in order to bridge the large revenue gap. At the
same time, state government support, in the form of timely and increased subsidy disbursal,
will have to materialise to address the funding requirements. While the efforts by state
governments and ministry of power are a meaningful and concerted attempt at addressing
the concerns that have been bogging down the power distribution sector, it is the seriousness
and urgency with which the proposed measures are implemented which will be crucial.
Conclusion
Table 1: Risk Clustering of State Governments
Karnataka, DelhiCluster I (Highest ability to support)
Gujarat, Maharashtra, Andhra Pradesh, Haryana, Tamil Nadu, Chhatisgarh, GoaCluster II
Uttar Pradesh, Madhya Pradesh, Jharkhand, Punjab, Rajasthan, Puducherry, Orissa, Kerala, Assam, Uttarakhand
Cluster III
Himachal Pradesh, West Bengal, Bihar, Sikkim, Arunachal Pradesh, Meghalaya, Tripura, Jammu & Kashmir, Manipur, Nagaland, Mizoram
Cluster IV (Lowest ability to suppport)
Parameters States
Power Sector Lenders: Will the credit quality trip?
Annexure I
Annexure II
Status of Latest Tariff Hikes in Select States
Financial Metrics for Risk Clustering of State Governments
State Tariff Hikes Remarks
Andhra Pradesh 2% Only tariff for domestic and industry consumers increased.
Delhi 22% Tariff hikes across consumer categories
Gujarat 2.6-4.7% Tariff hikes across consumer categories
Jharkhand 16.50% Tariff hikes across consumer categories
Maharashtra 17% Tariff hikes across consumer categories
Orissa 20%
Punjab 7-12% Last hike in 2010. But varrying hikes for consumers categories.
Rajasthan 15-30% Across categories. Tariff hike after 2005.
Tamil Nadu 3% Tariff Hike after 7 years and only for domestic consumers
Bihar 19% Tariff hike petitioned by board was 65%
West Bengal
Source: SERCs, CRISIL Analysis
Introduction of monthly variable cost adjustment
Parameters Financial Ratios Analysed
Fiscal Management Revenue Deficit/Revenue Receipt (RR)
Gross Fiscal Deficit (GFD)/Gross State Domestic Product (GSDP)
Capital Outlay/GSDP
Non-Developmental Revenue Expenditure/RR
Self Reliance State's Own Tax Revenues/GSDPCentral Devolutions/RR
Own Revenues/Revenue Expenditure
Debt Servicing Capability (Debt+Guarantees)/GSDP
(Debt+Guarantees)/RR
RR/Interest
29
Risks related to fuel and project execution will increase power generation costs
Executive Summary
Thermal capacity additions to drive increase in generation capacity in India
The power generation sector today faces a key structural threat in the form of fuel availability
and pricing. CRISIL believes that significant constraints in domestic availability of fuel will lead
to increased reliance on imported fuel, which is costlier. This, coupled with project execution
risks, has the potential to delay project implementation and raise the cost of generation
substantially for upcoming capacities. CRISIL believes that the impact of these risks will be
threefold: a) procurement costs for the distribution companies (discoms) will increase by 10 to
12 per cent; b) further weakening in discoms' financial risk profiles will lead to stretch in
receivables for the generation sector; and c) rising fuel bill will impact generation capacities
which have part or no fuel price pass through, which could result in deferral of projects.
This article outlines the increased risks in the operating environment, mainly for thermal
capacities, as these are the key sources of power in the country, and the impact of these risks
on the generation sector as well as the discoms.
Encouraged by the Government of India's policy initiatives to attract investment in the power
sector, large capacity addition plans have been announced in the sector. Capacity additions
totaling 65 gigawatts (GW) are planned between 2011-12 (refers to financial year, April 1 to
March 31) and 2014-15, to increase India's total power generation capacity to 239 GW by the
end of 2014-15. Nearly 89 per cent of the planned capacity additions are based on coal, gas, or
lignite, which would increase the thermal capacity proportion in India's total generation mix
to over 70 per cent by the end of 2014-15 from 65 per cent currently.
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
Annexure III
2Status of Reforms & Restructuring in States
2 Unbundling has been done in Punjab and Tamil Nadu after April 21, 2010; privatisation has
only happened in Delhi and Orissa
23Open Access Regulation
9Multi Year Tariff/ ARR Order IssuedDistribution Reforms
23Issuing Tariff Orders
26Operational
28ConstitutedSERC
2Privatisation of Distribution
20Unbundling/Corporatisaion – Implemented*Unbundling/Corporatisaion
No. of State where implemented (out of 29 States)
ParticularsReform/Restructure Agenda
29
Risks related to fuel and project execution will increase power generation costs
Executive Summary
Thermal capacity additions to drive increase in generation capacity in India
The power generation sector today faces a key structural threat in the form of fuel availability
and pricing. CRISIL believes that significant constraints in domestic availability of fuel will lead
to increased reliance on imported fuel, which is costlier. This, coupled with project execution
risks, has the potential to delay project implementation and raise the cost of generation
substantially for upcoming capacities. CRISIL believes that the impact of these risks will be
threefold: a) procurement costs for the distribution companies (discoms) will increase by 10 to
12 per cent; b) further weakening in discoms' financial risk profiles will lead to stretch in
receivables for the generation sector; and c) rising fuel bill will impact generation capacities
which have part or no fuel price pass through, which could result in deferral of projects.
This article outlines the increased risks in the operating environment, mainly for thermal
capacities, as these are the key sources of power in the country, and the impact of these risks
on the generation sector as well as the discoms.
Encouraged by the Government of India's policy initiatives to attract investment in the power
sector, large capacity addition plans have been announced in the sector. Capacity additions
totaling 65 gigawatts (GW) are planned between 2011-12 (refers to financial year, April 1 to
March 31) and 2014-15, to increase India's total power generation capacity to 239 GW by the
end of 2014-15. Nearly 89 per cent of the planned capacity additions are based on coal, gas, or
lignite, which would increase the thermal capacity proportion in India's total generation mix
to over 70 per cent by the end of 2014-15 from 65 per cent currently.
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
Annexure III
2Status of Reforms & Restructuring in States
2 Unbundling has been done in Punjab and Tamil Nadu after April 21, 2010; privatisation has
only happened in Delhi and Orissa
23Open Access Regulation
9Multi Year Tariff/ ARR Order IssuedDistribution Reforms
23Issuing Tariff Orders
26Operational
28ConstitutedSERC
2Privatisation of Distribution
20Unbundling/Corporatisaion – Implemented*Unbundling/Corporatisaion
No. of State where implemented (out of 29 States)
ParticularsReform/Restructure Agenda
1 While these capacity additions are imperative, in view of the current high energy deficit
levels (peak power deficit and energy deficit were 9.8 and 8.5 per cent, respectively, in 2010-
11), in view of the past slippages in implementation and increased risks in the operating
environment, driven by increased fuel and project execution risks, it is likely that some of
these planned additions may not materialise.
Of the revised target of 50,756 megawatts (MW) of thermal capacity to be added during the
Eleventh Five Year Plan, actual capacity addition till 2010-11 has been only 29,461 MW.CRISIL
has observed time and cost overruns in various projects under implementation. While most
private sector promoters have experience in setting up power generation capacities, the
projects announced/under implementation are nearly 4 times the operational capacities. This
leads to increased challenges in terms of tying up financing for the project and bringing in large
equity commitments for the planned projects. Furthermore, issues related to project
complexity, delay in land acquisition and clearances, and bottlenecks in equipment supply are
listed below:1. Project complexity and delays in land acquisition The increased project complexity is evidenced by the fact that while the largest subcritical
boiler turbine generator (BTG) package was 600 MW a few years ago, BTG packages based on
supercritical technology can now be as large as 800 MW. The execution is also significantly
impacted by delays in land acquisition, necessitating increased focus of the project companies
i. There have been significant delays in project execution on account of multiple reasons.
Risks related to fuel and project execution will increase power generation costs
on resettlement and rehabilitation issues. Delays in land acquisition can impact not only the
implementation of the power project, but also the associated evacuation infrastructure as
well.2. Gradual ramp-up in domestic equipment supply capacityAs compared to the fast pace of planned capacity additions, the ramp-up in domestic
equipment capacity has been gradual, resulting in delays in supply of equipment. CRISIL has
observed delays ranging from 3 to 12 months in supply of equipment, which has, in turn,
impacted implementation.
3. Delay in receipt of environmental and forest clearancesEnvironmental clearances impact the pace of financial closure and are pre-requisites for
signing fuel supply agreements (FSAs) with Coal India Ltd (CIL) and its subsidiaries. CRISIL has
observed significant delays on this front, impacting financial closure and leading to delays in
project implementation.
Time overruns result in cost overruns on account of rising interest during construction. As
most projects are ongoing, the final cost overruns cannot be determined. However, the extent
to which the cost overruns will be allowed as a pass-through will determine the increase in
tariff; the impact of the same will be spread over the life of the project.
In an environment marked by rising trend in inflation, interest rates and unfavourable
movements in foreign exchange rates, CRISIL believes that delays in project execution and
consequent cost overruns will result in an increase in cost of generation. The nature of the
agreements signed between the developers and the offtakers will determine its impact on
project viability.
The domestic power generation sector's current demand for coal and gas is 427 million tonnes
per annum and 72 million metric standard cubic meters per day (mmscmd), respectively.
Demand for fuel by coal- and gas-based plants is increasing at a faster rate than the supply.
The demand for coal from the power sector registered a compound annual growth rate
(CAGR) of 9 per cent over the past four years in line with the capacity addition; on the other
hand, the domestic supply of coal registered a CAGR of only 6 per cent over the period. The
factors constraining growth in the supply of coal are varied and include delays in receipt of
ii. Structural shift in fuel supply dynamics to result in increased reliance on imported fuel
65% 64% 63% 64% 65%
26% 25% 25% 23% 22%
6% 8% 9% 10% 10%
3% 3% 3% 3% 3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006-07 2007-08 2008-09 2009-10 2010-11
Thermal Hydel Renewable Nuclear
1215
17
21
174
239
0
50
100
150
200
250
300
2010-11 2011-12 2012-13 2013-14 2014-15
Chart I - Dominant source of power: thermal Chart II - Annual capacity additions (GW)
1 Source: CRISIL Research, CRISIL Ratings, company websites, media
Power Sector Lenders: Will the credit quality trip? 31
1 While these capacity additions are imperative, in view of the current high energy deficit
levels (peak power deficit and energy deficit were 9.8 and 8.5 per cent, respectively, in 2010-
11), in view of the past slippages in implementation and increased risks in the operating
environment, driven by increased fuel and project execution risks, it is likely that some of
these planned additions may not materialise.
Of the revised target of 50,756 megawatts (MW) of thermal capacity to be added during the
Eleventh Five Year Plan, actual capacity addition till 2010-11 has been only 29,461 MW.CRISIL
has observed time and cost overruns in various projects under implementation. While most
private sector promoters have experience in setting up power generation capacities, the
projects announced/under implementation are nearly 4 times the operational capacities. This
leads to increased challenges in terms of tying up financing for the project and bringing in large
equity commitments for the planned projects. Furthermore, issues related to project
complexity, delay in land acquisition and clearances, and bottlenecks in equipment supply are
listed below:1. Project complexity and delays in land acquisition The increased project complexity is evidenced by the fact that while the largest subcritical
boiler turbine generator (BTG) package was 600 MW a few years ago, BTG packages based on
supercritical technology can now be as large as 800 MW. The execution is also significantly
impacted by delays in land acquisition, necessitating increased focus of the project companies
i. There have been significant delays in project execution on account of multiple reasons.
Risks related to fuel and project execution will increase power generation costs
on resettlement and rehabilitation issues. Delays in land acquisition can impact not only the
implementation of the power project, but also the associated evacuation infrastructure as
well.2. Gradual ramp-up in domestic equipment supply capacityAs compared to the fast pace of planned capacity additions, the ramp-up in domestic
equipment capacity has been gradual, resulting in delays in supply of equipment. CRISIL has
observed delays ranging from 3 to 12 months in supply of equipment, which has, in turn,
impacted implementation.
3. Delay in receipt of environmental and forest clearancesEnvironmental clearances impact the pace of financial closure and are pre-requisites for
signing fuel supply agreements (FSAs) with Coal India Ltd (CIL) and its subsidiaries. CRISIL has
observed significant delays on this front, impacting financial closure and leading to delays in
project implementation.
Time overruns result in cost overruns on account of rising interest during construction. As
most projects are ongoing, the final cost overruns cannot be determined. However, the extent
to which the cost overruns will be allowed as a pass-through will determine the increase in
tariff; the impact of the same will be spread over the life of the project.
In an environment marked by rising trend in inflation, interest rates and unfavourable
movements in foreign exchange rates, CRISIL believes that delays in project execution and
consequent cost overruns will result in an increase in cost of generation. The nature of the
agreements signed between the developers and the offtakers will determine its impact on
project viability.
The domestic power generation sector's current demand for coal and gas is 427 million tonnes
per annum and 72 million metric standard cubic meters per day (mmscmd), respectively.
Demand for fuel by coal- and gas-based plants is increasing at a faster rate than the supply.
The demand for coal from the power sector registered a compound annual growth rate
(CAGR) of 9 per cent over the past four years in line with the capacity addition; on the other
hand, the domestic supply of coal registered a CAGR of only 6 per cent over the period. The
factors constraining growth in the supply of coal are varied and include delays in receipt of
ii. Structural shift in fuel supply dynamics to result in increased reliance on imported fuel
65% 64% 63% 64% 65%
26% 25% 25% 23% 22%
6% 8% 9% 10% 10%
3% 3% 3% 3% 3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006-07 2007-08 2008-09 2009-10 2010-11
Thermal Hydel Renewable Nuclear
1215
17
21
174
239
0
50
100
150
200
250
300
2010-11 2011-12 2012-13 2013-14 2014-15
Chart I - Dominant source of power: thermal Chart II - Annual capacity additions (GW)
1 Source: CRISIL Research, CRISIL Ratings, company websites, media
Power Sector Lenders: Will the credit quality trip? 31
33
Risks related to fuel and project execution will increase power generation costs
environmental and forest clearances and in land acquisition, and local law and order
problems.
Owing to the moderate growth in supply, no new FSA has been signed after March 2009.
CRISIL estimates that the annual demand for coal from the power sector will increase to as
much as 750 million tonnes by 2014-15 depending on pace of capacity additions.
In the absence of similar growth in domestic coal supply, the annual demand-supply gap is
expected to increase to over 200 million tonnes by 2014-15, taking the proportion of
imported coal in coal mix to 26 per cent from around 12 per cent currently.
Consequently, it is likely that CIL will commit to provide domestic fuel only to the extent of 50
per cent of the annual contracted quantity for plants commissioned in the Twelfth Five Year
Plan. CRISIL believes that more than 80 per cent of the projects commissioned from 2011-12 2will have a fuel linkage only in the form of Memorandum of Understanding or tapering
linkage. These projects will, therefore, have to increasingly rely on higher coal imports to meet
fuel needs; imported fuel is nearly 2.5 times to 3 times costlier (on a landed cost basis) than
domestic coal on a calorie-adjusted basis, thus increasing the fuel bill.
Gas-based plants are also vulnerable to decline in production from the Krishna Godavari (KG)
basin. Decline in production from the KG basin increased the gas demand-supply gap for the
2 Memorandum of Understanding has to be renewed every year, thereby posing risks on account of potential delays in renewal, as
against FSAs which are relatively long-term agreements, ranging between 20 to 25 years.
power sector to 7 mmscmd in 2010-11 from 1 mmscmd in 2009-10. This gap has been filled by
costlier imported regassified liquefied natural gas (R-LNG). As supply of gas from domestic
sources is unlikely to meet incremental demand, dependence on imported R-LNG will
increase. R-LNG is nearly 1.5 times costlier than domestic fuel. The extent to which the gas
deficit is met through imports will determine the increase in fuel bill.
While a few players in the power generation sector have acquired coal mines in Indonesia and
Australia to secure fuel supply for their planned capacity additions, regulatory risks in the
countries of acquisition are substantial. For instance, to correctly price its coal resources, the
Government of Indonesia has linked coal price to a benchmark based on international coal
prices; the coal price benchmark is an average of monthly prices on four coal indices: the
Indonesian Coal-price Index, the Globalcoal Newcastle Index, the Newcastle Export Index, and
the Platts-1 Index. Accordingly, all contracts entered into by companies for procuring
Indonesian coal either with group companies or external suppliers had to be modified before
September 23, 2011. The increase in coal prices could, in this case, be as high as 2.5 times,
assuming no fluctuations in foreign exchange rate.
Rising coal prices could lead to deferral of projects as a large fuel bill could impact the
fundamental viability of some of the projects and the financial closure of some projects, as
project financiers would perceive higher risks in funding projects with high imported fuel
content.
298322
374398
427431457
493
532 539
0
100
200
300
400
500
600
2006-07 2007-08 2008-09 2009-10 2010-11
Coal Consumption Domestic supply
77101
133
166
200
0
50
100
150
200
250
2010-11 2011-12P 2012-13P 2013-14P 2014-15P
39 40
60
72
3335
5965
0
10
20
30
40
50
60
70
80
2007-08 2008-09 2009-10 2010-11
Demand (mmscmd) Domestic supply (mmscmd)
7
19
45
66
80
0
10
20
30
40
50
60
70
80
90
2010-11 2011-12P 2012-13P 2013-14P 2014-15P
Deficit (mmscmd)
9%
6%
Chart 3: Coal demand by power sector (mt) Chart 4: Projected coal deficit (mt)Chart 5: Demand, supply of gas for power sector Chart 6: Projected gas deficit
Power Sector Lenders: Will the credit quality trip?
33
Risks related to fuel and project execution will increase power generation costs
environmental and forest clearances and in land acquisition, and local law and order
problems.
Owing to the moderate growth in supply, no new FSA has been signed after March 2009.
CRISIL estimates that the annual demand for coal from the power sector will increase to as
much as 750 million tonnes by 2014-15 depending on pace of capacity additions.
In the absence of similar growth in domestic coal supply, the annual demand-supply gap is
expected to increase to over 200 million tonnes by 2014-15, taking the proportion of
imported coal in coal mix to 26 per cent from around 12 per cent currently.
Consequently, it is likely that CIL will commit to provide domestic fuel only to the extent of 50
per cent of the annual contracted quantity for plants commissioned in the Twelfth Five Year
Plan. CRISIL believes that more than 80 per cent of the projects commissioned from 2011-12 2will have a fuel linkage only in the form of Memorandum of Understanding or tapering
linkage. These projects will, therefore, have to increasingly rely on higher coal imports to meet
fuel needs; imported fuel is nearly 2.5 times to 3 times costlier (on a landed cost basis) than
domestic coal on a calorie-adjusted basis, thus increasing the fuel bill.
Gas-based plants are also vulnerable to decline in production from the Krishna Godavari (KG)
basin. Decline in production from the KG basin increased the gas demand-supply gap for the
2 Memorandum of Understanding has to be renewed every year, thereby posing risks on account of potential delays in renewal, as
against FSAs which are relatively long-term agreements, ranging between 20 to 25 years.
power sector to 7 mmscmd in 2010-11 from 1 mmscmd in 2009-10. This gap has been filled by
costlier imported regassified liquefied natural gas (R-LNG). As supply of gas from domestic
sources is unlikely to meet incremental demand, dependence on imported R-LNG will
increase. R-LNG is nearly 1.5 times costlier than domestic fuel. The extent to which the gas
deficit is met through imports will determine the increase in fuel bill.
While a few players in the power generation sector have acquired coal mines in Indonesia and
Australia to secure fuel supply for their planned capacity additions, regulatory risks in the
countries of acquisition are substantial. For instance, to correctly price its coal resources, the
Government of Indonesia has linked coal price to a benchmark based on international coal
prices; the coal price benchmark is an average of monthly prices on four coal indices: the
Indonesian Coal-price Index, the Globalcoal Newcastle Index, the Newcastle Export Index, and
the Platts-1 Index. Accordingly, all contracts entered into by companies for procuring
Indonesian coal either with group companies or external suppliers had to be modified before
September 23, 2011. The increase in coal prices could, in this case, be as high as 2.5 times,
assuming no fluctuations in foreign exchange rate.
Rising coal prices could lead to deferral of projects as a large fuel bill could impact the
fundamental viability of some of the projects and the financial closure of some projects, as
project financiers would perceive higher risks in funding projects with high imported fuel
content.
298322
374398
427431457
493
532 539
0
100
200
300
400
500
600
2006-07 2007-08 2008-09 2009-10 2010-11
Coal Consumption Domestic supply
77101
133
166
200
0
50
100
150
200
250
2010-11 2011-12P 2012-13P 2013-14P 2014-15P
39 40
60
72
3335
5965
0
10
20
30
40
50
60
70
80
2007-08 2008-09 2009-10 2010-11
Demand (mmscmd) Domestic supply (mmscmd)
7
19
45
66
80
0
10
20
30
40
50
60
70
80
90
2010-11 2011-12P 2012-13P 2013-14P 2014-15P
Deficit (mmscmd)
9%
6%
Chart 3: Coal demand by power sector (mt) Chart 4: Projected coal deficit (mt)Chart 5: Demand, supply of gas for power sector Chart 6: Projected gas deficit
Power Sector Lenders: Will the credit quality trip?
35
Risks related to fuel and project execution will increase power generation costs
Furthermore, logistical limitations, in terms of coal/gas handling capacities at the ports and
rail transport to the hinterland, could become severe bottlenecks if improvement in port and
rail infrastructure in India does not take keep pace with expected increase in fuel imports.
CRISIL believes that significant constraints in domestic availability of fuel will lead to increased
reliance on imported fuel, which is costlier. CRISIL expects fuel-related costs to increase by 14
to 15 per cent annually, as against 6 to 7 per cent over the past few years on account of rising
proportion of imported fuel in the fuel mix and general inflation in fuel prices.
CRISIL believes that the impact of the above-mentioned risks will be threefold.
Nearly 95 per cent of the existing 111-GW thermal capacity enjoys fuel pass-through.
Furthermore, nearly 60 per cent of the thermal capacity additions are estimated to have
complete pass-through of fuel cost increase. Therefore, a large part of the increase in cost of
generation will be borne by the discoms.
CRISIL expects, on average, the weighted average cost of power procurement (power
generated from all sources) for discoms to increase by 10 per cent to 12 per cent annually,
driven largely by the increase in cost of generation for the thermal capacities. The increase will
be driven by fuel as well as rising capital costs.
1. Cost of procurement for discoms will rise by 10 to 12 per cent annually
2. Generation capacities with no/limited fuel price increase pass-through clause to see
negative impact on profitability, leading to deferral of projects
3. Receivables of generation companies will rise because of continued weak financial
health of discoms
Nearly 19 GW of the power generation capacities under implementation have no or limited
ability to pass through fuel cost increases. CRISIL believes that, compared to existing capacities
with near complete reliance on domestic fuel, these projects will have to rely on imported coal
to meet around 50 to 60 per cent of their fuel requirement. These capacities will, therefore,
see larger-than-expected fuel bills on account of an unfavourable fuel mix. As these capacities
have no or partial pass-through clause, their profitability and cash flows will be affected.
Furthermore, these projects may find it difficult to get financing on account of inadequate
cash flows, leading to a deferral in projects.
CRISIL believes that receivable days of power generation entities with higher exposure to
Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh, Madhya Pradesh, Jharkhand,
and Andhra Pradesh could increase as these discoms have weak financial risk profiles. Their
losses account for around 85 per cent of the power sector's losses and around 80 per cent of
the debt of the power distribution sector is concentrated in discoms of these states.
167111
193
34
0
20
40
60
80
100
120
140
160
180
2010-11 Part/no pass through Merchant Pass through 2014-15
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
FY10E FY11E FY12P FY13P
95% capacity has full pass through
80 to 85% capacity to have full pass
through
Chart 7: Large part of capacity additions to still enjoy pass-through of fuel costs
Chart 8: Average cost of procurement (Rs/kwh)
Power Sector Lenders: Will the credit quality trip?
35
Risks related to fuel and project execution will increase power generation costs
Furthermore, logistical limitations, in terms of coal/gas handling capacities at the ports and
rail transport to the hinterland, could become severe bottlenecks if improvement in port and
rail infrastructure in India does not take keep pace with expected increase in fuel imports.
CRISIL believes that significant constraints in domestic availability of fuel will lead to increased
reliance on imported fuel, which is costlier. CRISIL expects fuel-related costs to increase by 14
to 15 per cent annually, as against 6 to 7 per cent over the past few years on account of rising
proportion of imported fuel in the fuel mix and general inflation in fuel prices.
CRISIL believes that the impact of the above-mentioned risks will be threefold.
Nearly 95 per cent of the existing 111-GW thermal capacity enjoys fuel pass-through.
Furthermore, nearly 60 per cent of the thermal capacity additions are estimated to have
complete pass-through of fuel cost increase. Therefore, a large part of the increase in cost of
generation will be borne by the discoms.
CRISIL expects, on average, the weighted average cost of power procurement (power
generated from all sources) for discoms to increase by 10 per cent to 12 per cent annually,
driven largely by the increase in cost of generation for the thermal capacities. The increase will
be driven by fuel as well as rising capital costs.
1. Cost of procurement for discoms will rise by 10 to 12 per cent annually
2. Generation capacities with no/limited fuel price increase pass-through clause to see
negative impact on profitability, leading to deferral of projects
3. Receivables of generation companies will rise because of continued weak financial
health of discoms
Nearly 19 GW of the power generation capacities under implementation have no or limited
ability to pass through fuel cost increases. CRISIL believes that, compared to existing capacities
with near complete reliance on domestic fuel, these projects will have to rely on imported coal
to meet around 50 to 60 per cent of their fuel requirement. These capacities will, therefore,
see larger-than-expected fuel bills on account of an unfavourable fuel mix. As these capacities
have no or partial pass-through clause, their profitability and cash flows will be affected.
Furthermore, these projects may find it difficult to get financing on account of inadequate
cash flows, leading to a deferral in projects.
CRISIL believes that receivable days of power generation entities with higher exposure to
Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh, Madhya Pradesh, Jharkhand,
and Andhra Pradesh could increase as these discoms have weak financial risk profiles. Their
losses account for around 85 per cent of the power sector's losses and around 80 per cent of
the debt of the power distribution sector is concentrated in discoms of these states.
167111
193
34
0
20
40
60
80
100
120
140
160
180
2010-11 Part/no pass through Merchant Pass through 2014-15
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
FY10E FY11E FY12P FY13P
95% capacity has full pass through
80 to 85% capacity to have full pass
through
Chart 7: Large part of capacity additions to still enjoy pass-through of fuel costs
Chart 8: Average cost of procurement (Rs/kwh)
Power Sector Lenders: Will the credit quality trip?
CRISIL has existing ratings of 'CRISIL AAA/Stable/CRISIL A1+' on Power Finance Corporation
Limited's (PFC's) debt instruments. In this article, CRISIL answers the questions most
frequently asked by investors regarding the ratings.
CRISIL's ratings on PFC's debt instruments are driven by the corporation's high strategic
importance to GoI; this strategic importance is reflected in PFC's role in implementing GoI
policies, and its importance in financing India's power sector, particularly the state power
utilities (SPUs). Additionally, majority ownership by GoI implies a strong moral obligation on
the government to support PFC in the event of an exigency.
In its policy implementation role, PFC acts as the nodal agency for the following:l Development of Ultra Mega Power Projects (UMPPs) with a minimum capacity of 4000
megawatts (MW) each: Under the UMPP scheme, PFC incorporates wholly owned
subsidiaries as special purpose vehicles (SPVs) for the projects; these SPVs undertake
preliminary studies and obtain necessary linkages, clearances, land, and approvals,
including for water, land and power sale arrangements. Subsequently, the SPVs are
transferred to successful bidders, who then implement these projects, on payment of
development costs incurred by each SPV. Till date, PFC has incorporated a total of 12
wholly owned SPVs for the UMPPs, four of which have been transferred to successful
bidders.l Restructured Accelerated Power Development and Reform Programme (R-APDRP): This
programme aims to reduce transmission and distribution losses of the SPUs. PFC acts as a
single window under the programme, in coordination with the other stakeholders such
as the Ministry of Power (MoP), Steering Committee, Central Electricity Authority (CEA),
National Thermal Power Corporation (NTPC), Power Grid Corporation of India Ltd
(PGCIL), and consultants to achieve speedy and timely completion of projects, and
thereby assist the utilities in achieving loss reduction targets. Cumulative sanctions and
disbursements under R-APDRP till March 31, 2011, were Rs.218.2 billion and Rs.39.0
billion, respectively. l PFC is also the bid process coordinator for the Independent Transmission Projects (ITP)
scheme, which is a tariff-based competitive bidding process for ITPs for the development
of transmission systems through private sector participation. Five SPVs were initially
1. Why is PFC strategically important to the Government of India (GoI)? What is the
extent of support from GoI that has been factored into PFC's ratings?
37
FAQs on Power Finance Corporation Limited
Power Sector Lenders: Will the credit quality trip?
Conclusion
Capacity additions over the next few years will be crucial for reducing India's consistently high
peak power deficits and energy deficits. CRISIL, however, believes that the increase in capital
costs, increased risks in project execution, and higher reliance on imported fuel, will result in
an upward pressure on the cost of power generation for new capacities. This will, in turn,
impact the discoms, raising their power purchase costs, exacerbating their already weak
financial position.
A knowledge sharing endeavour from CRISIL
Insights
CRISIL has existing ratings of 'CRISIL AAA/Stable/CRISIL A1+' on Power Finance Corporation
Limited's (PFC's) debt instruments. In this article, CRISIL answers the questions most
frequently asked by investors regarding the ratings.
CRISIL's ratings on PFC's debt instruments are driven by the corporation's high strategic
importance to GoI; this strategic importance is reflected in PFC's role in implementing GoI
policies, and its importance in financing India's power sector, particularly the state power
utilities (SPUs). Additionally, majority ownership by GoI implies a strong moral obligation on
the government to support PFC in the event of an exigency.
In its policy implementation role, PFC acts as the nodal agency for the following:l Development of Ultra Mega Power Projects (UMPPs) with a minimum capacity of 4000
megawatts (MW) each: Under the UMPP scheme, PFC incorporates wholly owned
subsidiaries as special purpose vehicles (SPVs) for the projects; these SPVs undertake
preliminary studies and obtain necessary linkages, clearances, land, and approvals,
including for water, land and power sale arrangements. Subsequently, the SPVs are
transferred to successful bidders, who then implement these projects, on payment of
development costs incurred by each SPV. Till date, PFC has incorporated a total of 12
wholly owned SPVs for the UMPPs, four of which have been transferred to successful
bidders.l Restructured Accelerated Power Development and Reform Programme (R-APDRP): This
programme aims to reduce transmission and distribution losses of the SPUs. PFC acts as a
single window under the programme, in coordination with the other stakeholders such
as the Ministry of Power (MoP), Steering Committee, Central Electricity Authority (CEA),
National Thermal Power Corporation (NTPC), Power Grid Corporation of India Ltd
(PGCIL), and consultants to achieve speedy and timely completion of projects, and
thereby assist the utilities in achieving loss reduction targets. Cumulative sanctions and
disbursements under R-APDRP till March 31, 2011, were Rs.218.2 billion and Rs.39.0
billion, respectively. l PFC is also the bid process coordinator for the Independent Transmission Projects (ITP)
scheme, which is a tariff-based competitive bidding process for ITPs for the development
of transmission systems through private sector participation. Five SPVs were initially
1. Why is PFC strategically important to the Government of India (GoI)? What is the
extent of support from GoI that has been factored into PFC's ratings?
37
FAQs on Power Finance Corporation Limited
Power Sector Lenders: Will the credit quality trip?
Conclusion
Capacity additions over the next few years will be crucial for reducing India's consistently high
peak power deficits and energy deficits. CRISIL, however, believes that the increase in capital
costs, increased risks in project execution, and higher reliance on imported fuel, will result in
an upward pressure on the cost of power generation for new capacities. This will, in turn,
impact the discoms, raising their power purchase costs, exacerbating their already weak
financial position.
A knowledge sharing endeavour from CRISIL
Insights
incorporated under ITPs, of which one has been liquidated, while three have been
transferred to the successful bidders.
PFC also plays a significant role in financing the power sector in India.l PFC is the single largest lender to the power sector, with advances of Rs.996 billion (refer
to Chart 1); it had a share of 21 per cent in the total outstanding advances to the power
sector as on March 31, 2011.
Chart 1: Largest lenders to the power sector
Source: Company data, Annual Reports
l The importance of PFC in channeling financing to the domestic power sector is
underscored by the fact that PFC, together with REC, accounted for about 42 per cent of
the aggregate debt outstanding of SPUs as on March 31, 2010 (the latest period for which
data is available ; refer to Chart 2). In the Indian context, SPUs form the back bone of the
power sector, with more than 40 per cent of the country's generation capacity and 95 per
cent of the distribution network. The share of PFC and REC is estimated to have reduced to
about 40 per cent as on March 31, 2011, as banks have increased their exposure to the
power sector; the share is, however, unlikely to reduce further. Clearly, PFC will remain a
key financier to SPUs, and therefore, play a key role in sustaining their operations.
39
FAQs on Power Finance Corporation Limited
Chart 2: Source of SPUs' borrowings as on March 31, 2010
Source: PFC report "Performance of State Power Utilities for the years 2007-08 to 2009-10"
Additionally, majority ownership, and a strong public perception of sovereign backing implies
a strong moral obligation on GoI to support PFC in the event of distress. Given PFC's strategic
role in implementing GoI's policy, channeling finance to the power sector, especially the SPUs,
and ensuring the sustainability of SPUs, and GoI's majority ownership of PFC, CRISIL believes
that PFC will continue to benefit from substantial support from GoI when necessary.
GoI had a 73.72 per cent stake in PFC as on June 30, 2011. The stake has reduced from 89.78
per cent subsequent to the follow-on public offering (FPO) of shares in May 2011. In line with
its policy for 'Navratna' companies, GoI is, however, expected to retain majority ownership in
PFC.
In the past, GoI has supported PFC through mechanisms such as allowing issue of tax-free
bonds, and asset protection mechanisms such as providing PFC access to Central Plan
Allocation funds for recovering dues from SPUs that have delayed repayments. PFC's board of
directors also has representation from the MoP.
2. Does CRISIL expect GoI to divest its majority shareholding in PFC? What is the
nature of support that GoI has provided, and is expected to provide, to PFC?
996
821
295
282
267
232
171
0 100 200 300 400 500 600 700 800 900 1000
PFC
REC
SBI
Canara Bank
IDFC
IDBI Bank
Central Bank of India
Advances-Power (Rs. Billion)
Power Sector Lenders: Will the credit quality trip?
REC21.1%
Banks/FIs/Bonds58.3%
PFC20.6%
incorporated under ITPs, of which one has been liquidated, while three have been
transferred to the successful bidders.
PFC also plays a significant role in financing the power sector in India.l PFC is the single largest lender to the power sector, with advances of Rs.996 billion (refer
to Chart 1); it had a share of 21 per cent in the total outstanding advances to the power
sector as on March 31, 2011.
Chart 1: Largest lenders to the power sector
Source: Company data, Annual Reports
l The importance of PFC in channeling financing to the domestic power sector is
underscored by the fact that PFC, together with REC, accounted for about 42 per cent of
the aggregate debt outstanding of SPUs as on March 31, 2010 (the latest period for which
data is available ; refer to Chart 2). In the Indian context, SPUs form the back bone of the
power sector, with more than 40 per cent of the country's generation capacity and 95 per
cent of the distribution network. The share of PFC and REC is estimated to have reduced to
about 40 per cent as on March 31, 2011, as banks have increased their exposure to the
power sector; the share is, however, unlikely to reduce further. Clearly, PFC will remain a
key financier to SPUs, and therefore, play a key role in sustaining their operations.
39
FAQs on Power Finance Corporation Limited
Chart 2: Source of SPUs' borrowings as on March 31, 2010
Source: PFC report "Performance of State Power Utilities for the years 2007-08 to 2009-10"
Additionally, majority ownership, and a strong public perception of sovereign backing implies
a strong moral obligation on GoI to support PFC in the event of distress. Given PFC's strategic
role in implementing GoI's policy, channeling finance to the power sector, especially the SPUs,
and ensuring the sustainability of SPUs, and GoI's majority ownership of PFC, CRISIL believes
that PFC will continue to benefit from substantial support from GoI when necessary.
GoI had a 73.72 per cent stake in PFC as on June 30, 2011. The stake has reduced from 89.78
per cent subsequent to the follow-on public offering (FPO) of shares in May 2011. In line with
its policy for 'Navratna' companies, GoI is, however, expected to retain majority ownership in
PFC.
In the past, GoI has supported PFC through mechanisms such as allowing issue of tax-free
bonds, and asset protection mechanisms such as providing PFC access to Central Plan
Allocation funds for recovering dues from SPUs that have delayed repayments. PFC's board of
directors also has representation from the MoP.
2. Does CRISIL expect GoI to divest its majority shareholding in PFC? What is the
nature of support that GoI has provided, and is expected to provide, to PFC?
996
821
295
282
267
232
171
0 100 200 300 400 500 600 700 800 900 1000
PFC
REC
SBI
Canara Bank
IDFC
IDBI Bank
Central Bank of India
Advances-Power (Rs. Billion)
Power Sector Lenders: Will the credit quality trip?
REC21.1%
Banks/FIs/Bonds58.3%
PFC20.6%
41
FAQs on Power Finance Corporation Limited
In recent times, GoI has stepped up its direct support to sectors that are considered critical for
economic growth and stability. For instance, in the aftermath of the financial crisis in 2008-09
(refers to financial year, April 1 to March 31), GoI has expanded its support for public sector
banks (PSBs) by infusing aggregate fresh equity capital of Rs.232 billion over the past three
years, and increasing its stake in PSBs to 58 per cent. It has also publicly committed to ensure
that the PSBs maintain capital adequacy of 12 per cent on a steady state basis.
CRISIL, therefore, believes that despite decline in its ownership, GoI will continue to provide
policy support and an enabling environment to PFC, given the criticality of power for
sustaining India's economic development and PFC's importance as a financier of SPUs. The
support may include measures such as asset protection mechanisms and funding support,
including special status to raise low-cost resources as and when required.
As Chart 1 indicates, PFC has a leadership position in providing finance to the domestic power
sector. As per CRISIL estimates, exposure to power sector constitutes bulk (around 60 per
cent) of the aggregate exposure to infrastructure sector of approximately Rs.8 trillion. PFC is
the largest provider of finance to the power sector, with a market share of around 21 per cent
as on March 31, 2011.
Over the past few years, competition for funding the power sector has increased
substantially; this is reflected in strong growth in the banking industry's advances to the
sector, especially in 2009-10 and 2010-11, when growth rates were at 51 per cent and 43 per
cent, respectively-far higher than the overall credit growth. PFC's share has moderated in this
period (refer to Chart 3).
3. What is PFC's competitive position in the infrastructure financing space? How is PFC
expected to maintain this position, in light of current challenges faced by the power sector?
Chart 3: Trends in share of banks and power financiers
Source: Company data, RBI data
However, the average tenor of the banks' liabilities is estimated to be 2.5 years, while
infrastructure exposures are typically of a substantially longer tenor. Given the inherent
mismatch, banks will face challenges in taking substantial incremental infrastructure
exposures. Additionally, the share of the power sector in the total infrastructure advances and
in the total advances of banks has increased (refer to Chart 4) .
Chart 4: Share of power sector in total banking non-food credit
Source: RBI data
49 53 56
25 23 21
20 19 17
6 6 7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011
As on March 31
Banks PFC REC Other IFCs
4.8
6.2
7.3
0%
2%
4%
6%
8%
10%
2009 2010
As on March 31
Share of power sector
2011
Power Sector Lenders: Will the credit quality trip?
41
FAQs on Power Finance Corporation Limited
In recent times, GoI has stepped up its direct support to sectors that are considered critical for
economic growth and stability. For instance, in the aftermath of the financial crisis in 2008-09
(refers to financial year, April 1 to March 31), GoI has expanded its support for public sector
banks (PSBs) by infusing aggregate fresh equity capital of Rs.232 billion over the past three
years, and increasing its stake in PSBs to 58 per cent. It has also publicly committed to ensure
that the PSBs maintain capital adequacy of 12 per cent on a steady state basis.
CRISIL, therefore, believes that despite decline in its ownership, GoI will continue to provide
policy support and an enabling environment to PFC, given the criticality of power for
sustaining India's economic development and PFC's importance as a financier of SPUs. The
support may include measures such as asset protection mechanisms and funding support,
including special status to raise low-cost resources as and when required.
As Chart 1 indicates, PFC has a leadership position in providing finance to the domestic power
sector. As per CRISIL estimates, exposure to power sector constitutes bulk (around 60 per
cent) of the aggregate exposure to infrastructure sector of approximately Rs.8 trillion. PFC is
the largest provider of finance to the power sector, with a market share of around 21 per cent
as on March 31, 2011.
Over the past few years, competition for funding the power sector has increased
substantially; this is reflected in strong growth in the banking industry's advances to the
sector, especially in 2009-10 and 2010-11, when growth rates were at 51 per cent and 43 per
cent, respectively-far higher than the overall credit growth. PFC's share has moderated in this
period (refer to Chart 3).
3. What is PFC's competitive position in the infrastructure financing space? How is PFC
expected to maintain this position, in light of current challenges faced by the power sector?
Chart 3: Trends in share of banks and power financiers
Source: Company data, RBI data
However, the average tenor of the banks' liabilities is estimated to be 2.5 years, while
infrastructure exposures are typically of a substantially longer tenor. Given the inherent
mismatch, banks will face challenges in taking substantial incremental infrastructure
exposures. Additionally, the share of the power sector in the total infrastructure advances and
in the total advances of banks has increased (refer to Chart 4) .
Chart 4: Share of power sector in total banking non-food credit
Source: RBI data
49 53 56
25 23 21
20 19 17
6 6 7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011
As on March 31
Banks PFC REC Other IFCs
4.8
6.2
7.3
0%
2%
4%
6%
8%
10%
2009 2010
As on March 31
Share of power sector
2011
Power Sector Lenders: Will the credit quality trip?
43
FAQs on Power Finance Corporation Limited
PFC also has a strong pipeline of undisbursed sanctions. Given the large volume of financing
required in the power sector and the fact that banks typically do not focus on a single sector,
CRISIL believes that PFC will maintain its strong competitive position in this space. This is
reflected in the fact that PFC's loan portfolio is more than three times the size of the power
portfolio of India's largest bank. Also, banks are focused on specific tenors (of less than 5
years) and segments (mostly, private generation projects). This enhances PFC's role as one of
the main providers of finance to the power sector, particularly SPUs.
PFC faces asset quality challenges on account of three main factors:l Weak financials of the largest borrower segment, the SPUs l Sectoral concentration l Key account concentration, which may lead to chunky non-performing assets (NPAs); the
top 10 borrowers accounted for 55 per cent of PFC's total loans as on March 31, 2011.
The first of these is the most critical, while the second will continue to exist given the
mandate. However, PFC’s direct exposure to state power utilities has reduced over time to 65
per cent as on March 31, 2011, from 72 per cent as on March 31, 2009. Additionally, almost 20
per cent of PFC's advances are to the central power utilities, which are usually highly rated
entities.
The company has been able to mitigate its asset quality risks and maintain strong collection
efficiency (more than 98 per cent on average over the past five years) and low gross NPAs (0.23
per cent as on March 31, 2011) owing to the incentive structure built into the recovery
process, its criticality to borrowers and the various asset protection mechanisms in place.
l PFC incentivises SPUs to make timely repayments by providing rebate of 0.25 per cent on
interest payable; this rebate is available only if the borrower services all its debt on time.l PFC halts any further disbursement on a facility if there is delay by the borrower in
payment on another facility. SPUs, therefore, delay payments to PFC only as a last resort,
because lack of access to PFC funding will substantially curb their operations and lead to
increase in interest payment on the entire debt availed of from PFC. Overdues to PFC
from the private sector are significantly higher than those from the state sector.
4. Given PFC's significant exposure to SPUs and the high sectoral and customer
concentration, how does it manage the asset quality risks in its portfolio?
l Additionally, PFC has also set in place several asset protection mechanisms for
state/central sector and private borrowers. m Advances to the central and state sector are generally secured either through a
charge on project assets, or by a state government guarantee, or both. In addition, as
on March 31, 2011, 80.5 per cent of outstanding loans to the state and central power
sector involved an escrow mechanism. However, state government guarantees will
not be extended henceforth, and the proportion of loans covered by such a guarantee
may, therefore, reduce over time. Currently the proportion of loans having state
government guarantees is 14.9 per cent. Nevertheless, use of fallback mechanisms
such as an escrow account has been minimal.m Advances to the private sector are secured through, among other things, a first
priority pari passu charge on the relevant project assets, collaterals such as pledges of
shares held by promoters, and personal/corporate guarantees and trust and
retention arrangements. l PFC also modifies its loan policies periodically to address heightened risks in its exposure.
For instance, in the case of all projects:m Fuel supply agreements (FSAs) have to be in place at the time of disbursement.
Earlier, PFC allowed 12 months time, post first disbursement to have an FSA in place.m A power purchase agreement (PPA) needs to be in place upfront, as opposed to
within one year earlier.
PFC has maintained a good collection performance till date. CRISIL, however, believes that
asset quality pressures may intensify in future if deterioration in the performance of SPUs is
not arrested. Additionally, given the high concentration risk, financial stress on any of these
borrowers could lead to significant increase in NPA levels for PFC. While CRISIL does not
expect significant impairment in PFC's lending portfolio in the near term, its underwriting and
credit monitoring mechanisms, and the financial health of SPUs will be key monitorables over
the medium term.
CRISIL has analysed PFC's state-wise SPU exposures (refer to Annexure I for details) and
classified these exposures based on risk levels. The risk levels were identified based on the
performance of the distribution companies, and applied to the total exposure to the state on
account of linkages among generation, transmission and distribution companies.
5. PFC has reported low gross NPAs. How does CRISIL analyse inherent risks in PFC's
portfolio?
Power Sector Lenders: Will the credit quality trip?
43
FAQs on Power Finance Corporation Limited
PFC also has a strong pipeline of undisbursed sanctions. Given the large volume of financing
required in the power sector and the fact that banks typically do not focus on a single sector,
CRISIL believes that PFC will maintain its strong competitive position in this space. This is
reflected in the fact that PFC's loan portfolio is more than three times the size of the power
portfolio of India's largest bank. Also, banks are focused on specific tenors (of less than 5
years) and segments (mostly, private generation projects). This enhances PFC's role as one of
the main providers of finance to the power sector, particularly SPUs.
PFC faces asset quality challenges on account of three main factors:l Weak financials of the largest borrower segment, the SPUs l Sectoral concentration l Key account concentration, which may lead to chunky non-performing assets (NPAs); the
top 10 borrowers accounted for 55 per cent of PFC's total loans as on March 31, 2011.
The first of these is the most critical, while the second will continue to exist given the
mandate. However, PFC’s direct exposure to state power utilities has reduced over time to 65
per cent as on March 31, 2011, from 72 per cent as on March 31, 2009. Additionally, almost 20
per cent of PFC's advances are to the central power utilities, which are usually highly rated
entities.
The company has been able to mitigate its asset quality risks and maintain strong collection
efficiency (more than 98 per cent on average over the past five years) and low gross NPAs (0.23
per cent as on March 31, 2011) owing to the incentive structure built into the recovery
process, its criticality to borrowers and the various asset protection mechanisms in place.
l PFC incentivises SPUs to make timely repayments by providing rebate of 0.25 per cent on
interest payable; this rebate is available only if the borrower services all its debt on time.l PFC halts any further disbursement on a facility if there is delay by the borrower in
payment on another facility. SPUs, therefore, delay payments to PFC only as a last resort,
because lack of access to PFC funding will substantially curb their operations and lead to
increase in interest payment on the entire debt availed of from PFC. Overdues to PFC
from the private sector are significantly higher than those from the state sector.
4. Given PFC's significant exposure to SPUs and the high sectoral and customer
concentration, how does it manage the asset quality risks in its portfolio?
l Additionally, PFC has also set in place several asset protection mechanisms for
state/central sector and private borrowers. m Advances to the central and state sector are generally secured either through a
charge on project assets, or by a state government guarantee, or both. In addition, as
on March 31, 2011, 80.5 per cent of outstanding loans to the state and central power
sector involved an escrow mechanism. However, state government guarantees will
not be extended henceforth, and the proportion of loans covered by such a guarantee
may, therefore, reduce over time. Currently the proportion of loans having state
government guarantees is 14.9 per cent. Nevertheless, use of fallback mechanisms
such as an escrow account has been minimal.m Advances to the private sector are secured through, among other things, a first
priority pari passu charge on the relevant project assets, collaterals such as pledges of
shares held by promoters, and personal/corporate guarantees and trust and
retention arrangements. l PFC also modifies its loan policies periodically to address heightened risks in its exposure.
For instance, in the case of all projects:m Fuel supply agreements (FSAs) have to be in place at the time of disbursement.
Earlier, PFC allowed 12 months time, post first disbursement to have an FSA in place.m A power purchase agreement (PPA) needs to be in place upfront, as opposed to
within one year earlier.
PFC has maintained a good collection performance till date. CRISIL, however, believes that
asset quality pressures may intensify in future if deterioration in the performance of SPUs is
not arrested. Additionally, given the high concentration risk, financial stress on any of these
borrowers could lead to significant increase in NPA levels for PFC. While CRISIL does not
expect significant impairment in PFC's lending portfolio in the near term, its underwriting and
credit monitoring mechanisms, and the financial health of SPUs will be key monitorables over
the medium term.
CRISIL has analysed PFC's state-wise SPU exposures (refer to Annexure I for details) and
classified these exposures based on risk levels. The risk levels were identified based on the
performance of the distribution companies, and applied to the total exposure to the state on
account of linkages among generation, transmission and distribution companies.
5. PFC has reported low gross NPAs. How does CRISIL analyse inherent risks in PFC's
portfolio?
Power Sector Lenders: Will the credit quality trip?
CRISIL has, thus, classified PFC's SPU exposures as follows:
Table 1: Risk classification of PFCs SPU exposures
CRISIL analyses potential slippages from the highest and high risk portfolios and the private
sector exposure to estimate the adequacy of capital to cover these asset-side risks and the
impact on earnings should the risks materialise.
PFC's NPA recognition norms differ from those of banks in two aspects:l PFC recognises NPAs at 180 days-past-due (dpd), while the banks do so at 90-dpd. l For loans to SPUs, PFC recognises NPAs facility-wise-in other words, only those facilities
that are 180 dpd are classified as NPAs; banks on the other hand classify all facilities of the
borrower as NPAs if any one facility has breached the 90-dpd mark.
For PFC’s exposures to the private sector, while NPAs are recognized at 180-dpd, any
individual facility turning into a NPA will lead to the entire exposure to that specific entity
being classified as NPA.
Table 2 presents PFC's bucket-wise delinquencies. To estimate PFC's gross NPA levels as
consistent with banking norms, CRISIL has considered PFC's total exposure to borrowers with
overdues of 90 days and more.
Table 2: Bucket-wise delinquencies as on March 31, 2011
* Taking into account all outstanding facilities of the borrower
6. How will PFC's gross NPA levels be affected if banks' NPA recognition norms were
applied to PFC?
Exposure (Rs. Bn.) Share in total SPU exposure
Highest Risk 229.6 35.6%
High Risk 205.3 31.8%
Moderate Risk 169.5 26.3%
Low Risk 40.8 6.3%
Total SPU exposure 645.1 100.0%
45
FAQs on Power Finance Corporation Limited
Given the politically sensitive nature of electricity and the fact that SPUs operate as an arm of
the respective state governments, CRISIL believes that the state governments will continue to
support the SPUs in making payments to PFC. PFC has a substantial exposure to high-risk
SPUs. Nevertheless, the ability of state governments to support SPUs mitigates asset quality
risks on these exposures. CRISIL has therefore, mapped these exposures against state
finances to arrive at a risk matrix that identifies the ultimate risk in PFC's loan book (refer to
CRISIL article ‘Credit quality of power sector lenders- potential risks ahead’ for
methodology).
Chart 5: Risk matrix of SPU exposures
Overdue Overdue Amount (Rs.Million.) Total Exposure to borrower* (Rs.Million.)
0-30 43
30-90 637
>90 382 9962
Total overdues 1062 9962
Total advances 995707 995707
Adjusted NPA 1.0%
Power Sector Lenders: Will the credit quality trip?
Cluster IV(Lowest)
Himachal PradeshWest Bengal
BiharJammu & KashmirNorth Eastern States (excluding Assam)
Cluster IIIKerala
Uttarakhand
JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh
AssamOrissa
Cluster IIGoa
GujaratChhattisgarhMaharashtra
Andhra PradeshHaryanaTamil Nadu
Cluster I (Highest)
Delhi Karnataka
Low Risk Moderate Risk High Risk
Risk profile of State Power Utilities
Stat
e G
ove
rnm
ent
abili
ty t
o s
up
po
rt
Highest Risk Moderate RiskHigh Risk Low Risk
CRISIL has, thus, classified PFC's SPU exposures as follows:
Table 1: Risk classification of PFCs SPU exposures
CRISIL analyses potential slippages from the highest and high risk portfolios and the private
sector exposure to estimate the adequacy of capital to cover these asset-side risks and the
impact on earnings should the risks materialise.
PFC's NPA recognition norms differ from those of banks in two aspects:l PFC recognises NPAs at 180 days-past-due (dpd), while the banks do so at 90-dpd. l For loans to SPUs, PFC recognises NPAs facility-wise-in other words, only those facilities
that are 180 dpd are classified as NPAs; banks on the other hand classify all facilities of the
borrower as NPAs if any one facility has breached the 90-dpd mark.
For PFC’s exposures to the private sector, while NPAs are recognized at 180-dpd, any
individual facility turning into a NPA will lead to the entire exposure to that specific entity
being classified as NPA.
Table 2 presents PFC's bucket-wise delinquencies. To estimate PFC's gross NPA levels as
consistent with banking norms, CRISIL has considered PFC's total exposure to borrowers with
overdues of 90 days and more.
Table 2: Bucket-wise delinquencies as on March 31, 2011
* Taking into account all outstanding facilities of the borrower
6. How will PFC's gross NPA levels be affected if banks' NPA recognition norms were
applied to PFC?
Exposure (Rs. Bn.) Share in total SPU exposure
Highest Risk 229.6 35.6%
High Risk 205.3 31.8%
Moderate Risk 169.5 26.3%
Low Risk 40.8 6.3%
Total SPU exposure 645.1 100.0%
45
FAQs on Power Finance Corporation Limited
Given the politically sensitive nature of electricity and the fact that SPUs operate as an arm of
the respective state governments, CRISIL believes that the state governments will continue to
support the SPUs in making payments to PFC. PFC has a substantial exposure to high-risk
SPUs. Nevertheless, the ability of state governments to support SPUs mitigates asset quality
risks on these exposures. CRISIL has therefore, mapped these exposures against state
finances to arrive at a risk matrix that identifies the ultimate risk in PFC's loan book (refer to
CRISIL article ‘Credit quality of power sector lenders- potential risks ahead’ for
methodology).
Chart 5: Risk matrix of SPU exposures
Overdue Overdue Amount (Rs.Million.) Total Exposure to borrower* (Rs.Million.)
0-30 43
30-90 637
>90 382 9962
Total overdues 1062 9962
Total advances 995707 995707
Adjusted NPA 1.0%
Power Sector Lenders: Will the credit quality trip?
Cluster IV(Lowest)
Himachal PradeshWest Bengal
BiharJammu & KashmirNorth Eastern States (excluding Assam)
Cluster IIIKerala
Uttarakhand
JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh
AssamOrissa
Cluster IIGoa
GujaratChhattisgarhMaharashtra
Andhra PradeshHaryanaTamil Nadu
Cluster I (Highest)
Delhi Karnataka
Low Risk Moderate Risk High Risk
Risk profile of State Power Utilities
Stat
e G
ove
rnm
ent
abili
ty t
o s
up
po
rt
Highest Risk Moderate RiskHigh Risk Low Risk
Based on the above table, even if the NPA recognition norms of banks were applied
completely to PFC, CRISIL estimates that the gross NPA levels of PFC would stand at around 1.0
per cent (against the banking industry average of 2.3 per cent).
While PFC's resource profile is wholesale in nature, this does not add significant risks to its
business profile as PFC is able to manage this well. PFC's instruments have wide market
acceptability, as reflected in their diversified investor base with a long-term investment
horizon, including Life Insurance Corporation of India (LIC), pension funds, and gratuity funds.
Other investors include mutual funds and banks. This allows PFC to borrow at low spreads
over G-Secs.
As can be seen in Chart 6, domestic bonds constitute 65.6 per cent of PFC’s total borrowings as
on March 31, 2011, and are usually subscribed to by LIC, Employees Provident Fund
Organisation (EPFO), and gratuity funds, which invest in longer tenor bonds. On the other
hand, loans from banks and financial institutions (FIs) constitute only 28.6 per cent of the total
borrowings. Therefore, the dependence on banks, which are also lenders to the power sector,
is low.
Chart 6: Borrowing profile as on March 31, 2011
7. Does the wholesale resource profile of PFC add any risks to its business profile?
How does PFC manage its asset-liability management (ALM) profile?
47
FAQs on Power Finance Corporation Limited
Having obtained the status of an Infrastructure Finance Company (IFC) from the Reserve Bank
of India (RBI), PFC's resource profile is also expected to benefit from the flexibility to raise
external borrowings. PFC can now raise external commercial borrowings (ECBs) up to 50 per
cent of its net worth, subject to a limit of USD500 million per year under the automatic route
as compared to the approval route earlier. PFC can also issue retail infrastructure bonds,
which will lend some stability to its funding requirements. In 2010-11, PFC raised ECBs of
USD500 million, resulting in the share of foreign currency loans increasing to around 6.0 per
cent as on March 31, 2011 from 4.0 per cent a year ago. PFC hedges only a limited portion of its
foreign exchange (forex) exposure. PFC has in place a board-approved corporate risk
management policy which lays out maximum limits for open forex positions. While PFC
regularly monitors such positions, any adverse movements in exchange or interest rates may
constrain the corporation's earnings, especially if the proportion of unhedged foreign
currency borrowings remains high.
Additionally, upon being classified as an NBFC-IFC, banks' exposure limit to PFC has increased
by 5 per cent of their capital funds. The risk weight for PFC as an NBFC-IFC is significantly
lower; this is expected to translate into lower cost of funds through bank borrowings.
PFC's resource profile is likely to remain wholesale in nature as it needs to raise long-term
funds to ensure adequate matching of its assets and liabilities; this is primarily driven by the
long tenure of its advances. Most retail funds have a shorter maturity.
PFC's ALM profile is well-matched, with average maturity of assets of 6.35 years and average
maturity of liabilities of 5.18 years as on March 31, 2011. It has a low reliance on short-term
borrowings (7.3 per cent of total borrowings as on March 31, 2011). As on March 31, 2011, the
negative mismatches-at 10 per cent of total outflows in the one-year bucket-are manageable.
PFC regularly monitors negative mismatches in its ALM profile, and shifts maturity of funds
being raised depending on negative gaps. The ALM framework includes monthly analysis of
the long-term liquidity of asset receipts and debt obligations. The time, volume and maturity
of borrowings, creation of new assets, and mix of assets and liabilities in terms of maturity
(short-, medium- or long-term) is decided based on the liquidity analysis.
Short Term Loans 7.3%
Bonds65.6%
Rupee Term Loans21.3%
Foreign Currency Loans 5.8%
Power Sector Lenders: Will the credit quality trip?
Based on the above table, even if the NPA recognition norms of banks were applied
completely to PFC, CRISIL estimates that the gross NPA levels of PFC would stand at around 1.0
per cent (against the banking industry average of 2.3 per cent).
While PFC's resource profile is wholesale in nature, this does not add significant risks to its
business profile as PFC is able to manage this well. PFC's instruments have wide market
acceptability, as reflected in their diversified investor base with a long-term investment
horizon, including Life Insurance Corporation of India (LIC), pension funds, and gratuity funds.
Other investors include mutual funds and banks. This allows PFC to borrow at low spreads
over G-Secs.
As can be seen in Chart 6, domestic bonds constitute 65.6 per cent of PFC’s total borrowings as
on March 31, 2011, and are usually subscribed to by LIC, Employees Provident Fund
Organisation (EPFO), and gratuity funds, which invest in longer tenor bonds. On the other
hand, loans from banks and financial institutions (FIs) constitute only 28.6 per cent of the total
borrowings. Therefore, the dependence on banks, which are also lenders to the power sector,
is low.
Chart 6: Borrowing profile as on March 31, 2011
7. Does the wholesale resource profile of PFC add any risks to its business profile?
How does PFC manage its asset-liability management (ALM) profile?
47
FAQs on Power Finance Corporation Limited
Having obtained the status of an Infrastructure Finance Company (IFC) from the Reserve Bank
of India (RBI), PFC's resource profile is also expected to benefit from the flexibility to raise
external borrowings. PFC can now raise external commercial borrowings (ECBs) up to 50 per
cent of its net worth, subject to a limit of USD500 million per year under the automatic route
as compared to the approval route earlier. PFC can also issue retail infrastructure bonds,
which will lend some stability to its funding requirements. In 2010-11, PFC raised ECBs of
USD500 million, resulting in the share of foreign currency loans increasing to around 6.0 per
cent as on March 31, 2011 from 4.0 per cent a year ago. PFC hedges only a limited portion of its
foreign exchange (forex) exposure. PFC has in place a board-approved corporate risk
management policy which lays out maximum limits for open forex positions. While PFC
regularly monitors such positions, any adverse movements in exchange or interest rates may
constrain the corporation's earnings, especially if the proportion of unhedged foreign
currency borrowings remains high.
Additionally, upon being classified as an NBFC-IFC, banks' exposure limit to PFC has increased
by 5 per cent of their capital funds. The risk weight for PFC as an NBFC-IFC is significantly
lower; this is expected to translate into lower cost of funds through bank borrowings.
PFC's resource profile is likely to remain wholesale in nature as it needs to raise long-term
funds to ensure adequate matching of its assets and liabilities; this is primarily driven by the
long tenure of its advances. Most retail funds have a shorter maturity.
PFC's ALM profile is well-matched, with average maturity of assets of 6.35 years and average
maturity of liabilities of 5.18 years as on March 31, 2011. It has a low reliance on short-term
borrowings (7.3 per cent of total borrowings as on March 31, 2011). As on March 31, 2011, the
negative mismatches-at 10 per cent of total outflows in the one-year bucket-are manageable.
PFC regularly monitors negative mismatches in its ALM profile, and shifts maturity of funds
being raised depending on negative gaps. The ALM framework includes monthly analysis of
the long-term liquidity of asset receipts and debt obligations. The time, volume and maturity
of borrowings, creation of new assets, and mix of assets and liabilities in terms of maturity
(short-, medium- or long-term) is decided based on the liquidity analysis.
Short Term Loans 7.3%
Bonds65.6%
Rupee Term Loans21.3%
Foreign Currency Loans 5.8%
Power Sector Lenders: Will the credit quality trip?
Base Case Stress CaseExposure at Risk -Highest Risk Rs. Bn. 23.0 68.9 -High Risk Rs. Bn. 10.3 20.5 -Private Sector Rs. Bn. 3.4 6.8Total Exposure at Risk Rs. Bn. 36.6 96.2Exposure at Risk Per cent 3.7 9.7Networth- Mar 31, 2011 Rs. Bn. 151.8 151.8Networth/ Exposure at Risk Times 4.1 1.6Networth- June 30, 2011 Rs. Bn. 192.8 192.8Networth/ Exposure at Risk Times 5.3 2.0
49
FAQs on Power Finance Corporation Limited
8. How does PFC's regulatory dispensation differ from those of other financiers?
9. Will the capital position of PFC be adequate to absorb shocks to its asset quality?
Since PFC is notified as a public financial institution, it is currently exempted from compliance
with most of the prudential norms applicable to NBFCs. However, upon being classified as an
NBFC-IFC, PFC's regulatory framework is gradually converging with those applicable to other
NBFC-IFCs. PFC also has its own internal guidelines, many of which already comply with the
regulatory norms applicable to NBFCs, although not entirely (refer to Annexure II for details).
PFC's regulatory dispensation differs from that of other financiers in the following aspects:l PFC's exposure norms with respect to lending to SPUs are higher than those applicable to
NBFC-IFCs and banks; this allows PFC to retain its sector focus.l PFC's NPA recognition norms are less stringent than those of banks and NBFC-IFCs,
resulting in lower reported gross NPAs.l Standard asset provisioning is not applicable for PFC
PFC is formulating a roadmap (in consultation with the MoP) for submission to RBI by March
31, 2012, setting out the manner in which it intends to comply with RBI prudential norms.
Additionally, RBI, in its various reports, has indicated that it is reexamining the exemptions
granted to government-owned NBFCs. Hence, many of the regulatory concessions currently
available to PFC may be phased out gradually over the medium term. Given PFC's comfortable
capitalisation and earnings profile, CRISIL believes that it will comply with the stringent
regulatory norms applicable to NBFC-IFCs, barring exposure norms.
PFC has comfortable capitalisation; as on March 31, 2011, PFC had a Tier-I capital adequacy
ratio (CAR) of 14.7 per cent, an overall CAR of 15.7 per cent, and a net worth of Rs.152 billion.
PFC has raised around Rs.34.3 billion through its FPO in May 2011. Being classified as NBFC-
IFC, it is required to maintain minimum Tier-I and overall CAR of 10 per cent and 15 per cent,
respectively. Its gearing remains adequate, at around 5.6 times as on March 31, 2011 (5.1
times a year ago). PFC's capitalisation is supported by healthy accruals to net worth as
reflected in the three-year average return on net worth ratio of 18.8 per cent. PFC's accruals
are expected to remain comfortable over the medium term, backed by stable interest
spreads. Given the FPO proceeds and comfortable internal accruals, CRISIL believes that PFC
will maintain adequate capitalisation over the medium term.
Additionally, PFC has flexibility to raise additional equity capital by diluting GoI's shareholding
(currently at 73.72 per cent) to support growth plans over the medium term; PFC can raise
around Rs.74 billion if it dilutes GoI holding to 51 per cent at current market prices.
CRISIL has analysed the adequacy of capital under two scenarios (refer to CRISIL article 'Power
distribution utilities- current issues and what lies ahead’ for details), based on PFC's asset
quality risks, taking into account the risk classification of PFC's SPU exposures (refer to Chart 5)
and the expected stress on its private sector exposures.l In the base case, CRISIL assumed slippages of 10 per cent from the highest risk SPU
portfolio, 5 per cent from the high risk portfolio, and 5 per cent from the private sector
portfolio.l The stress scenario assumed slippages of 30 per cent from the highest risk SPU portfolio,
10 per cent from the high risk portfolio, and 10 per cent from the private sector portfolio.
As can be seen in Table 3, under the base case scenario, PFC is expected to manage the
increased asset quality challenges. Its capital coverage for exposure at risk is expected to be
around 5.3 times. However, under the stress case scenario, its net worth coverage for
exposure at risk is likely to be low, at around 2.0 times, and PFC would require additional
capital to maintain adequate coverage for the increased NPAs.
Table 3: Capital coverage for asset side risks
Power Sector Lenders: Will the credit quality trip?
Base Case Stress CaseExposure at Risk -Highest Risk Rs. Bn. 23.0 68.9 -High Risk Rs. Bn. 10.3 20.5 -Private Sector Rs. Bn. 3.4 6.8Total Exposure at Risk Rs. Bn. 36.6 96.2Exposure at Risk Per cent 3.7 9.7Networth- Mar 31, 2011 Rs. Bn. 151.8 151.8Networth/ Exposure at Risk Times 4.1 1.6Networth- June 30, 2011 Rs. Bn. 192.8 192.8Networth/ Exposure at Risk Times 5.3 2.0
49
FAQs on Power Finance Corporation Limited
8. How does PFC's regulatory dispensation differ from those of other financiers?
9. Will the capital position of PFC be adequate to absorb shocks to its asset quality?
Since PFC is notified as a public financial institution, it is currently exempted from compliance
with most of the prudential norms applicable to NBFCs. However, upon being classified as an
NBFC-IFC, PFC's regulatory framework is gradually converging with those applicable to other
NBFC-IFCs. PFC also has its own internal guidelines, many of which already comply with the
regulatory norms applicable to NBFCs, although not entirely (refer to Annexure II for details).
PFC's regulatory dispensation differs from that of other financiers in the following aspects:l PFC's exposure norms with respect to lending to SPUs are higher than those applicable to
NBFC-IFCs and banks; this allows PFC to retain its sector focus.l PFC's NPA recognition norms are less stringent than those of banks and NBFC-IFCs,
resulting in lower reported gross NPAs.l Standard asset provisioning is not applicable for PFC
PFC is formulating a roadmap (in consultation with the MoP) for submission to RBI by March
31, 2012, setting out the manner in which it intends to comply with RBI prudential norms.
Additionally, RBI, in its various reports, has indicated that it is reexamining the exemptions
granted to government-owned NBFCs. Hence, many of the regulatory concessions currently
available to PFC may be phased out gradually over the medium term. Given PFC's comfortable
capitalisation and earnings profile, CRISIL believes that it will comply with the stringent
regulatory norms applicable to NBFC-IFCs, barring exposure norms.
PFC has comfortable capitalisation; as on March 31, 2011, PFC had a Tier-I capital adequacy
ratio (CAR) of 14.7 per cent, an overall CAR of 15.7 per cent, and a net worth of Rs.152 billion.
PFC has raised around Rs.34.3 billion through its FPO in May 2011. Being classified as NBFC-
IFC, it is required to maintain minimum Tier-I and overall CAR of 10 per cent and 15 per cent,
respectively. Its gearing remains adequate, at around 5.6 times as on March 31, 2011 (5.1
times a year ago). PFC's capitalisation is supported by healthy accruals to net worth as
reflected in the three-year average return on net worth ratio of 18.8 per cent. PFC's accruals
are expected to remain comfortable over the medium term, backed by stable interest
spreads. Given the FPO proceeds and comfortable internal accruals, CRISIL believes that PFC
will maintain adequate capitalisation over the medium term.
Additionally, PFC has flexibility to raise additional equity capital by diluting GoI's shareholding
(currently at 73.72 per cent) to support growth plans over the medium term; PFC can raise
around Rs.74 billion if it dilutes GoI holding to 51 per cent at current market prices.
CRISIL has analysed the adequacy of capital under two scenarios (refer to CRISIL article 'Power
distribution utilities- current issues and what lies ahead’ for details), based on PFC's asset
quality risks, taking into account the risk classification of PFC's SPU exposures (refer to Chart 5)
and the expected stress on its private sector exposures.l In the base case, CRISIL assumed slippages of 10 per cent from the highest risk SPU
portfolio, 5 per cent from the high risk portfolio, and 5 per cent from the private sector
portfolio.l The stress scenario assumed slippages of 30 per cent from the highest risk SPU portfolio,
10 per cent from the high risk portfolio, and 10 per cent from the private sector portfolio.
As can be seen in Table 3, under the base case scenario, PFC is expected to manage the
increased asset quality challenges. Its capital coverage for exposure at risk is expected to be
around 5.3 times. However, under the stress case scenario, its net worth coverage for
exposure at risk is likely to be low, at around 2.0 times, and PFC would require additional
capital to maintain adequate coverage for the increased NPAs.
Table 3: Capital coverage for asset side risks
Power Sector Lenders: Will the credit quality trip?
While PFC is currently exempt from standard asset provisioning requirements, it may need to
provide around Rs.3.0 billion in 2011-12 if it is required to make provisions based on NBFC
norms for the outstanding loans as on March 31, 2012. However, PFC has a reserve for bad and
doubtful debt, which, as on March 31, 2011, constituted around 1 per cent of total advances.
Another risk to earnings could be from the unhedged portion of foreign currency borrowings;
RBI allows strategic hedging by PFC. However, PFC monitors the exchange rate risk on a regular
basis.
CRISIL has also analysed the potential increase in provisioning requirements in the event of
inherent asset quality challenges playing out (refer to Table 5). PFC had exposure at risk of
Rs.36.6 billion (in the base case) and Rs.96.2 billion (in the stress case) as on March 31, 2011.
The analysis indicates that PFC will maintain adequate profitability even in a stress scenario. Table 5: Earnings impact of asset quality pressure
51
FAQs on Power Finance Corporation Limited
10. Will PFC’s profitability be under pressure in 2011-12, given the sharp increase in
borrowing costs over the past few months and increased competition from banks in
this lending space? What is the likely increase in provisioning requirement?PFC has demonstrated ability to manage profitability through interest rate cycles. PFC's Net
1Profitability Margin (NPM ; on a yearly average basis) is marked by adequate interest margins
and low operating expenses. Fee income forms a low proportion of overall income. Operating
expenses are significantly lower than those of banks and NBFCs, given that PFC does not have
branch costs and high employee costs.
Table 4: Trends in Net Profitability Margin
PFC's profitability has improved in the past few years, driven by comfortable interest spreads
following introduction of 3-and 10-year reset clauses on its long-term loans in 2007. Its
profitability is expected to remain comfortable. While domestic borrowing costs may
increase in 2011-12 because of hardening interest rates, PFC’s interest spreads will be
supported by ability to pass on a major part of this increase in the form of higher yields. The
pricing power is expected to be maintained over the next three or four years, given the large
financing requirements for the power sector. IFC status and improved net worth post the FPO
will also allow PFC to raise large ECBs. PFC's operating expenses ratio is expected to remain at
the current level, supporting its earnings profile.
Competition from banks is unlikely to increase materially over the next few years. The
competition between banks and PFC has not resulted in irrational pricing by either of them.
The differential in interest rates charged by banks and PFC is usually in between 25 and 50
basis points.
1 CRISIL uses NPM to analyse the core profitability of financing entities NPM is defined as (Yield on funds deployed) - (Average borrowing costs) - (Operating expense ratio) + (Fee income levels). The NPM calculation is based on CRISIL-adjusted numbers and hence would differ from the numbers reported by PFC. The interest spreads reported by PFC in the past four years (starting from the most recent) are 2.5 per cent, 2.6 per cent, 2.2 per cent, and 2.1 per cent.
Base Case Stress case
Exposure at risk Rs. Bn. 36.6 96.2
Provisions @10% for exposure at risk Rs. Bn. 3.7 9.6
Revised PBT Rs. Bn. 31.7 25.7
Revised PAT Rs. Bn. 23.5 19.1
Decline in PAT Per Cent 10.4 27.2
Revised RoA Per Cent 2.5 2.0
Power Sector Lenders: Will the credit quality trip?
2007-08
10.2
1.7
8.5
1.7
0.2
0.2
For the year 2010-11 2009-10 2008-09
Yield
Cost of borrowings
Interest spread
Opex.
Fee income
Net Profitability Margin (Pre-credit costs)
10.7
8.4
2.3
0.1
0.2
2.4
10.8
8.5
2.4
0.1
0.2
2.4 1.9
11.0
9.1
1.9
0.2
0.1
in per cent
While PFC is currently exempt from standard asset provisioning requirements, it may need to
provide around Rs.3.0 billion in 2011-12 if it is required to make provisions based on NBFC
norms for the outstanding loans as on March 31, 2012. However, PFC has a reserve for bad and
doubtful debt, which, as on March 31, 2011, constituted around 1 per cent of total advances.
Another risk to earnings could be from the unhedged portion of foreign currency borrowings;
RBI allows strategic hedging by PFC. However, PFC monitors the exchange rate risk on a regular
basis.
CRISIL has also analysed the potential increase in provisioning requirements in the event of
inherent asset quality challenges playing out (refer to Table 5). PFC had exposure at risk of
Rs.36.6 billion (in the base case) and Rs.96.2 billion (in the stress case) as on March 31, 2011.
The analysis indicates that PFC will maintain adequate profitability even in a stress scenario. Table 5: Earnings impact of asset quality pressure
51
FAQs on Power Finance Corporation Limited
10. Will PFC’s profitability be under pressure in 2011-12, given the sharp increase in
borrowing costs over the past few months and increased competition from banks in
this lending space? What is the likely increase in provisioning requirement?PFC has demonstrated ability to manage profitability through interest rate cycles. PFC's Net
1Profitability Margin (NPM ; on a yearly average basis) is marked by adequate interest margins
and low operating expenses. Fee income forms a low proportion of overall income. Operating
expenses are significantly lower than those of banks and NBFCs, given that PFC does not have
branch costs and high employee costs.
Table 4: Trends in Net Profitability Margin
PFC's profitability has improved in the past few years, driven by comfortable interest spreads
following introduction of 3-and 10-year reset clauses on its long-term loans in 2007. Its
profitability is expected to remain comfortable. While domestic borrowing costs may
increase in 2011-12 because of hardening interest rates, PFC’s interest spreads will be
supported by ability to pass on a major part of this increase in the form of higher yields. The
pricing power is expected to be maintained over the next three or four years, given the large
financing requirements for the power sector. IFC status and improved net worth post the FPO
will also allow PFC to raise large ECBs. PFC's operating expenses ratio is expected to remain at
the current level, supporting its earnings profile.
Competition from banks is unlikely to increase materially over the next few years. The
competition between banks and PFC has not resulted in irrational pricing by either of them.
The differential in interest rates charged by banks and PFC is usually in between 25 and 50
basis points.
1 CRISIL uses NPM to analyse the core profitability of financing entities NPM is defined as (Yield on funds deployed) - (Average borrowing costs) - (Operating expense ratio) + (Fee income levels). The NPM calculation is based on CRISIL-adjusted numbers and hence would differ from the numbers reported by PFC. The interest spreads reported by PFC in the past four years (starting from the most recent) are 2.5 per cent, 2.6 per cent, 2.2 per cent, and 2.1 per cent.
Base Case Stress case
Exposure at risk Rs. Bn. 36.6 96.2
Provisions @10% for exposure at risk Rs. Bn. 3.7 9.6
Revised PBT Rs. Bn. 31.7 25.7
Revised PAT Rs. Bn. 23.5 19.1
Decline in PAT Per Cent 10.4 27.2
Revised RoA Per Cent 2.5 2.0
Power Sector Lenders: Will the credit quality trip?
2007-08
10.2
1.7
8.5
1.7
0.2
0.2
For the year 2010-11 2009-10 2008-09
Yield
Cost of borrowings
Interest spread
Opex.
Fee income
Net Profitability Margin (Pre-credit costs)
10.7
8.4
2.3
0.1
0.2
2.4
10.8
8.5
2.4
0.1
0.2
2.4 1.9
11.0
9.1
1.9
0.2
0.1
in per cent
53
FAQs on Power Finance Corporation Limited
State PFC’s Exposure (Rs. Bn.)
Maharashtra 105.3
Rajasthan 89.0
Andhra Pradesh 77.3
Uttar Pradesh 75.2
Tamil Nadu 55.1
Madhya Pradesh 51.2
Chhattisgarh 37.5
Haryana 33.2
West Bengal 26.4
Gujarat 24.3
Karnataka 16.2
Delhi 15.6
Uttarakhand 10.4
Himachal Pradesh 10.1
Jammu& Kashmir 7.6
Bihar 2.2
Assam 2.2
Jharkhand 1.2
Punjab 1.2
Orissa 1.1
Sikkim 1.0
Meghalaya 1.0
Others 1.1
TOTAL 645.1
Annexure I- State-wise break-up of PFC's SPU exposures
Power Sector Lenders: Will the credit quality trip?
Annexure II- Regulatory Framework for Banks, IFCs and PFC
S. No Parameter Banks IFCs PFC Comments
1 Exposure Limits
Lending to single borrower
20% of capital funds for infra exposures
25% of owned funds i. 100 per cent of net worth for central power utilities and state power utilities; can go up by another 50%ii In respect of private projects/ utilities, PFC follows RBI guidelines i.e. single borrower limit of 25%, and group borrower limit of 40% of its owned funds.
Exposure norms for SPUs higher than that for IFCs and banks allows them to grow their book and maintian competitveness. However, it also results in higher concentration risks.
Lending to a single group of borrowers
40% of owned funds
2 NPA recognition
Days past due (dpd) NPA recognition at 90+ dpd
NPA recognition at 180+ dpd
NPA recognition at 180+ dpd. Reported NPAs lower than would be case if banks' NPA recognition norms were followed. GNPA would be around 1% if banking norms were applied
Facility wise / Borrower wise
Borrower wise (i.e. all the loans of the borrower are classified as NPAs)
Loans to state/central sector entities are considered loan/facility wise. Loans to private sector entities are considered borrower wise
Provisioning requirements
For NPAsSubstandard Doubtful (> 3 years)Loss
15%25% to 100%100%
10%20% to 50%100%
10%20% - 100% depending on period for which asset has been substandard
No material impact because of low GNPA levels
For standard assets 0.40% of standard assets (other than CRE, agri, SME, teaser loans)
0.25% of standard assets (w.e.f. March 2012)
Currently not applicable Profits (before tax) will be be lower by about Rs.3.0 billion in 2011-12 if this is introduced
4 Capital adequacy
Tier I CAR 6% 10% 10% No impact
Overall CAR 9% 15% 15% No impact
Risk weights Rating wise 100% 100% (except for state govt guaranteed exposures which carry 20%)
Existing norms in line with that applicable for NBFCs
5 Asset Liability Management
Limit on negative mismatches upto 30 days (as % of the cash outflows in the respective time buckets)
Next day 5%2-7 days 10%8-14 days 15%15-28 days 20%
1 to 30/31 days time-bucket should not exceed 15 % of outflows of each time-bucket and the cumulative gap upto 1 year period should not exceed 15% of the cumulative cash outflows upto 1 year.
No regulatory ALM limits are applicable. Internal limits are fixed by a consultant; currently negative mismatches should not exceed 15% of total outflows in the next 12 months bucket. PFC’s Asset Liability Management Committee continuously monitors the ALM position and additional borrowings are done with the mismatches under consideration.
While there is no regulatory ALM limits, ALM position is comfortable with manageable level of mismatches and low dependence on ST borrowings
3
50% of capital funds forinfra exposures
53
FAQs on Power Finance Corporation Limited
State PFC’s Exposure (Rs. Bn.)
Maharashtra 105.3
Rajasthan 89.0
Andhra Pradesh 77.3
Uttar Pradesh 75.2
Tamil Nadu 55.1
Madhya Pradesh 51.2
Chhattisgarh 37.5
Haryana 33.2
West Bengal 26.4
Gujarat 24.3
Karnataka 16.2
Delhi 15.6
Uttarakhand 10.4
Himachal Pradesh 10.1
Jammu& Kashmir 7.6
Bihar 2.2
Assam 2.2
Jharkhand 1.2
Punjab 1.2
Orissa 1.1
Sikkim 1.0
Meghalaya 1.0
Others 1.1
TOTAL 645.1
Annexure I- State-wise break-up of PFC's SPU exposures
Power Sector Lenders: Will the credit quality trip?
Annexure II- Regulatory Framework for Banks, IFCs and PFC
S. No Parameter Banks IFCs PFC Comments
1 Exposure Limits
Lending to single borrower
20% of capital funds for infra exposures
25% of owned funds i. 100 per cent of net worth for central power utilities and state power utilities; can go up by another 50%ii In respect of private projects/ utilities, PFC follows RBI guidelines i.e. single borrower limit of 25%, and group borrower limit of 40% of its owned funds.
Exposure norms for SPUs higher than that for IFCs and banks allows them to grow their book and maintian competitveness. However, it also results in higher concentration risks.
Lending to a single group of borrowers
40% of owned funds
2 NPA recognition
Days past due (dpd) NPA recognition at 90+ dpd
NPA recognition at 180+ dpd
NPA recognition at 180+ dpd. Reported NPAs lower than would be case if banks' NPA recognition norms were followed. GNPA would be around 1% if banking norms were applied
Facility wise / Borrower wise
Borrower wise (i.e. all the loans of the borrower are classified as NPAs)
Loans to state/central sector entities are considered loan/facility wise. Loans to private sector entities are considered borrower wise
Provisioning requirements
For NPAsSubstandard Doubtful (> 3 years)Loss
15%25% to 100%100%
10%20% to 50%100%
10%20% - 100% depending on period for which asset has been substandard
No material impact because of low GNPA levels
For standard assets 0.40% of standard assets (other than CRE, agri, SME, teaser loans)
0.25% of standard assets (w.e.f. March 2012)
Currently not applicable Profits (before tax) will be be lower by about Rs.3.0 billion in 2011-12 if this is introduced
4 Capital adequacy
Tier I CAR 6% 10% 10% No impact
Overall CAR 9% 15% 15% No impact
Risk weights Rating wise 100% 100% (except for state govt guaranteed exposures which carry 20%)
Existing norms in line with that applicable for NBFCs
5 Asset Liability Management
Limit on negative mismatches upto 30 days (as % of the cash outflows in the respective time buckets)
Next day 5%2-7 days 10%8-14 days 15%15-28 days 20%
1 to 30/31 days time-bucket should not exceed 15 % of outflows of each time-bucket and the cumulative gap upto 1 year period should not exceed 15% of the cumulative cash outflows upto 1 year.
No regulatory ALM limits are applicable. Internal limits are fixed by a consultant; currently negative mismatches should not exceed 15% of total outflows in the next 12 months bucket. PFC’s Asset Liability Management Committee continuously monitors the ALM position and additional borrowings are done with the mismatches under consideration.
While there is no regulatory ALM limits, ALM position is comfortable with manageable level of mismatches and low dependence on ST borrowings
3
50% of capital funds forinfra exposures
55
FAQs on Rural Electrification Corporation Limited
CRISIL has existing ratings of 'CRISIL AAA/Stable/CRISIL A1+' on Rural Electrification
Corporation Limited's (REC's) debt instruments. In this article, CRISIL answers the questions
most frequently asked by investors regarding the ratings.
CRISIL's ratings on REC's debt instruments are driven by the corporation's high strategic
importance to GoI; this strategic importance is reflected in REC's role in implementing GoI
policies, and its importance in financing India's power sector, particularly state power utilities
(SPUs). Additionally, majority ownership by GoI implies a strong moral obligation on the
government to support REC in the event of an exigency.
REC is the nodal agency for channeling finance for GoI's rural electrification programme under
Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). RGGVY aims at electrifying all villages
and habitations, providing access to electricity to all rural households, and providing
electricity connection free of charge to below-poverty-line (BPL) families. Under the
programme, 90 per cent grant is provided by GoI, while REC provides 10 per cent as loan to the
state governments. The loans have tenure of 15 years, with a 5-year moratorium on the
principal. As on March 31, 2011, 96,562 villages had been electrified and 15.98 million free
electricity connections had been released to BPL households. The cumulative disbursements
by REC towards RGGVY stood at Rs.228.8 billion till March 31, 2011.
REC also plays a significant role in financing the power sector in India:l REC is the second largest lender to the power sector (refer to Chart 1): its total outstanding
loans were about thrice the size of the power sector exposure of the largest Indian bank.
With advances of Rs.821.32 billion, REC had a share of about 17 per cent in the total
outstanding advances to the power sector as on March 31, 2011.
1. Why is REC strategically important to the Government of India (GoI)? What is the extent
of support from GoI that has been factored into REC's ratings?
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
55
FAQs on Rural Electrification Corporation Limited
CRISIL has existing ratings of 'CRISIL AAA/Stable/CRISIL A1+' on Rural Electrification
Corporation Limited's (REC's) debt instruments. In this article, CRISIL answers the questions
most frequently asked by investors regarding the ratings.
CRISIL's ratings on REC's debt instruments are driven by the corporation's high strategic
importance to GoI; this strategic importance is reflected in REC's role in implementing GoI
policies, and its importance in financing India's power sector, particularly state power utilities
(SPUs). Additionally, majority ownership by GoI implies a strong moral obligation on the
government to support REC in the event of an exigency.
REC is the nodal agency for channeling finance for GoI's rural electrification programme under
Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). RGGVY aims at electrifying all villages
and habitations, providing access to electricity to all rural households, and providing
electricity connection free of charge to below-poverty-line (BPL) families. Under the
programme, 90 per cent grant is provided by GoI, while REC provides 10 per cent as loan to the
state governments. The loans have tenure of 15 years, with a 5-year moratorium on the
principal. As on March 31, 2011, 96,562 villages had been electrified and 15.98 million free
electricity connections had been released to BPL households. The cumulative disbursements
by REC towards RGGVY stood at Rs.228.8 billion till March 31, 2011.
REC also plays a significant role in financing the power sector in India:l REC is the second largest lender to the power sector (refer to Chart 1): its total outstanding
loans were about thrice the size of the power sector exposure of the largest Indian bank.
With advances of Rs.821.32 billion, REC had a share of about 17 per cent in the total
outstanding advances to the power sector as on March 31, 2011.
1. Why is REC strategically important to the Government of India (GoI)? What is the extent
of support from GoI that has been factored into REC's ratings?
Power Sector Lenders: Will the credit quality trip?
A knowledge sharing endeavour from CRISIL
Insights
57
Chart 1: Largest lenders to the power sector
Source: Company Data, Annual Reports
l The importance of REC in channeling financing to the domestic power sector is
underscored by the fact that PFC, together with REC, accounted for about 42 per cent of
the aggregate debt outstanding of SPUs as on March 31, 2010 (the latest period for which
data is available; refer to Chart 2). In the Indian context, SPUs form the back bone of the
power sector, with more than 40 per cent of the country's generation capacity and 95 per
cent of the distribution network. The share of PFC and REC is estimated to have reduced to
about 40 per cent as on March 31, 2011, as banks have increased their exposure to the
power sector; the share is, however, unlikely to reduce further. Clearly, REC will remain a
key financier to SPUs, and therefore, play a key role in sustaining their operations.
Chart 2: Source of SPUs' borrowings as on March 31, 2010
Source: PFC report “Performance of State Power Utilities for the Years 2007-08 to 2009-10”
Additionally, majority ownership and a strong public perception of sovereign backing implies
a strong moral obligation on GoI to support REC in the event of distress. Given REC's strategic
role in implementing GoI's policy, channeling finance to the power sector, especially SPUs,
and ensuring the sustainability of SPUs, and GoI's majority ownership of REC, CRISIL believes
that REC will continue to benefit from substantial support from GoI when necessary.
As on June 30, 2011, GoI had stake of around 67 per cent in REC. REC raised Rs.26.28 billion
through a follow-on public offering in February 2010, which resulted in dilution of GoI's
shareholding to 66.8 per cent from 81.2 per cent as on December 31, 2009. In line with its
policy for 'Navratna' companies, GoI is, however, expected to retain majority ownership in
REC.
In the past, GoI has supported REC by granting it special status to raise capital gains exemption
bonds (under Section 54EC of the Income-tax Act, 1961), allowing issue of tax-free bonds, and
through asset protection mechanisms such as providing access to Central Plan Allocation
funds for recovering dues from SPUs that have delayed repayments. REC's board of directors
also has representation from the Ministry of Power (MoP).
2. Does CRISIL expect GoI to divest its majority shareholding in REC? What is the nature of
support that GoI has provided, and is expected to provide, to REC?
996
821
295
282
267
232
171
0 100 200 300 400 500 600 700 800 900 1000
PFC
REC
SBI
Canara Bank
IDFC
IDBI Bank
Central Bank of India
Advances-Power (Rs. Billion)
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
REC21.1%
Banks/FIs/Bonds58.3%
PFC20.6%
57
Chart 1: Largest lenders to the power sector
Source: Company Data, Annual Reports
l The importance of REC in channeling financing to the domestic power sector is
underscored by the fact that PFC, together with REC, accounted for about 42 per cent of
the aggregate debt outstanding of SPUs as on March 31, 2010 (the latest period for which
data is available; refer to Chart 2). In the Indian context, SPUs form the back bone of the
power sector, with more than 40 per cent of the country's generation capacity and 95 per
cent of the distribution network. The share of PFC and REC is estimated to have reduced to
about 40 per cent as on March 31, 2011, as banks have increased their exposure to the
power sector; the share is, however, unlikely to reduce further. Clearly, REC will remain a
key financier to SPUs, and therefore, play a key role in sustaining their operations.
Chart 2: Source of SPUs' borrowings as on March 31, 2010
Source: PFC report “Performance of State Power Utilities for the Years 2007-08 to 2009-10”
Additionally, majority ownership and a strong public perception of sovereign backing implies
a strong moral obligation on GoI to support REC in the event of distress. Given REC's strategic
role in implementing GoI's policy, channeling finance to the power sector, especially SPUs,
and ensuring the sustainability of SPUs, and GoI's majority ownership of REC, CRISIL believes
that REC will continue to benefit from substantial support from GoI when necessary.
As on June 30, 2011, GoI had stake of around 67 per cent in REC. REC raised Rs.26.28 billion
through a follow-on public offering in February 2010, which resulted in dilution of GoI's
shareholding to 66.8 per cent from 81.2 per cent as on December 31, 2009. In line with its
policy for 'Navratna' companies, GoI is, however, expected to retain majority ownership in
REC.
In the past, GoI has supported REC by granting it special status to raise capital gains exemption
bonds (under Section 54EC of the Income-tax Act, 1961), allowing issue of tax-free bonds, and
through asset protection mechanisms such as providing access to Central Plan Allocation
funds for recovering dues from SPUs that have delayed repayments. REC's board of directors
also has representation from the Ministry of Power (MoP).
2. Does CRISIL expect GoI to divest its majority shareholding in REC? What is the nature of
support that GoI has provided, and is expected to provide, to REC?
996
821
295
282
267
232
171
0 100 200 300 400 500 600 700 800 900 1000
PFC
REC
SBI
Canara Bank
IDFC
IDBI Bank
Central Bank of India
Advances-Power (Rs. Billion)
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
REC21.1%
Banks/FIs/Bonds58.3%
PFC20.6%
59
In recent times, GoI has stepped up its direct support to sectors that are considered critical for
economic growth and stability. For instance, in the aftermath of the financial crisis in 2008-09
(refers to financial year, April 1 to March 31), GoI has expanded its support for public sector
banks (PSBs) by infusing aggregate fresh equity capital of Rs.232 billion over the past three
years, and increasing its stake in PSBs to 58 per cent. It has also publicly committed to ensure
that PSBs maintain capital adequacy ratio (CAR) of 12 per cent on a steady state basis.
CRISIL, therefore, believes that despite decline in its ownership, GoI will continue to provide
policy support and an enabling environment to REC, given the criticality of power for
sustaining India's economic development and REC's importance as a lender to SPUs. The
support may include measures such as asset protection mechanisms and funding support,
including special status to raise low-cost resources as and when required.
As Chart 1 indicates, REC is among the top three financers to the domestic power sector. As
per CRISIL estimates, power sector advances constitute around 60 per cent of the aggregate
advances to the infrastructure sector of approximately Rs.8 trillion. REC is the second largest
provider of finance to the power sector, with a market share of around 17 per cent as on
March 31, 2011. In particular, REC is the key entity for financing transmission and distribution
projects being implemented by SPUs in the country.
Over the past few years, competition for funding the power sector has increased
substantially; this is reflected in strong growth in the banking industry's advances to the
sector, especially in 2009-10 and 2010-11, when growth rates were at 51 per cent and 43 per
cent, respectively, far higher than the overall credit growth. REC's share has moderated in this
period (refer to Chart 3).
3 What is REC's competitive position in the infrastructure financing space? How is REC
expected to maintain this position, in light of current challenges faced by the power sector?
Chart 3: Trend in share of banks and power financiers
Source: Company data, RBI data
However, the average tenor of the banks' liabilities is estimated at 2.5 years, while
infrastructure exposures are typically of a substantially longer tenor. Given the inherent
mismatch, banks will face challenges in taking substantial incremental infrastructure
exposures. Also, the share of the power sector in the total infrastructure advances and in the
total advances of banks has increased (refer to Chart 4).
Chart 4: Share of power sector in total banking sector non-food credit
Source: RBI data
49 53 56
25 23 21
20 19 17
6 6 7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011
As on March 31
Banks PFC REC Other IFCs
4.8
6.2
7.3
0%
2%
4%
6%
8%
10%
2009 2010
As on March 31
Share of power sector
2011
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
59
In recent times, GoI has stepped up its direct support to sectors that are considered critical for
economic growth and stability. For instance, in the aftermath of the financial crisis in 2008-09
(refers to financial year, April 1 to March 31), GoI has expanded its support for public sector
banks (PSBs) by infusing aggregate fresh equity capital of Rs.232 billion over the past three
years, and increasing its stake in PSBs to 58 per cent. It has also publicly committed to ensure
that PSBs maintain capital adequacy ratio (CAR) of 12 per cent on a steady state basis.
CRISIL, therefore, believes that despite decline in its ownership, GoI will continue to provide
policy support and an enabling environment to REC, given the criticality of power for
sustaining India's economic development and REC's importance as a lender to SPUs. The
support may include measures such as asset protection mechanisms and funding support,
including special status to raise low-cost resources as and when required.
As Chart 1 indicates, REC is among the top three financers to the domestic power sector. As
per CRISIL estimates, power sector advances constitute around 60 per cent of the aggregate
advances to the infrastructure sector of approximately Rs.8 trillion. REC is the second largest
provider of finance to the power sector, with a market share of around 17 per cent as on
March 31, 2011. In particular, REC is the key entity for financing transmission and distribution
projects being implemented by SPUs in the country.
Over the past few years, competition for funding the power sector has increased
substantially; this is reflected in strong growth in the banking industry's advances to the
sector, especially in 2009-10 and 2010-11, when growth rates were at 51 per cent and 43 per
cent, respectively, far higher than the overall credit growth. REC's share has moderated in this
period (refer to Chart 3).
3 What is REC's competitive position in the infrastructure financing space? How is REC
expected to maintain this position, in light of current challenges faced by the power sector?
Chart 3: Trend in share of banks and power financiers
Source: Company data, RBI data
However, the average tenor of the banks' liabilities is estimated at 2.5 years, while
infrastructure exposures are typically of a substantially longer tenor. Given the inherent
mismatch, banks will face challenges in taking substantial incremental infrastructure
exposures. Also, the share of the power sector in the total infrastructure advances and in the
total advances of banks has increased (refer to Chart 4).
Chart 4: Share of power sector in total banking sector non-food credit
Source: RBI data
49 53 56
25 23 21
20 19 17
6 6 7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011
As on March 31
Banks PFC REC Other IFCs
4.8
6.2
7.3
0%
2%
4%
6%
8%
10%
2009 2010
As on March 31
Share of power sector
2011
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
61
REC also has a strong pipeline of undisbursed sanctions. Given the large volume of financing
required in the power sector, and the fact that banks focus on multiple sectors, CRISIL believes
that REC will maintain its strong competitive position in this space. This is reflected in the fact
that REC's loan portfolio is about three times the size of the power sector portfolio of India's
largest bank. Also, banks are focused on specific tenors (of less than five years) and segments
(mostly private generation projects). This enhances REC's role as one of the main providers of
finance to the power sector, particularly SPUs.
REC faces asset quality challenges on account of three main factors:l Weak financial risk profiles of the largest borrower segment - SPUs (around 83 per cent of
its advances were to SPUs as on March 31, 2011, as against 85 per cent as on March 31,
2009), l Sectoral concentration l Key account concentration, which may lead to large exposures turning into non-
performing assets (NPAs); the top 10 borrowers accounted for about 46.5 per cent of
REC's advances as on March 31, 2011, as against 45 per cent as on March 31, 2009.
The first of these is the most critical, while the second will continue to exist given the mandate.
REC, nevertheless, has been able to mitigate these risks and maintain low gross NPAs (of 0.02
per cent as on March 31, 2011) and healthy collection efficiency. Its collection efficiency has
remained high (at around 99 per cent on average) in the past three years. This is owing to its
criticality to borrowers and the asset protection mechanisms in place.l REC halts any further disbursement on a facility if there is delay by the borrower in
payment on another facility. SPUs, therefore, delay payments to REC only as a last resort,
because lack of access to REC funding will substantially curb their operations and lead to
increase in interest payment on the entire debt availed of from REC. As on March 31, 2011,
most of REC's NPAs were from the private sector.l Additionally, REC has set in place several asset protection mechanisms for state/central
sector and private borrowers.m Advances to the central and state sector are generally secured either through a charge
on project assets, or by a state government guarantee, or both. In addition, as on
4. Given REC's significant exposure to SPUs and the high sectoral and customer
concentration, how does it manage the asset quality risks in its portfolio?
March 31, 2011, about 80 per cent of outstanding loans to the state and central power
sector involved an escrow mechanism. However, state government guarantees will
not be extended henceforth, and the proportion of loans covered by such a guarantee
may, therefore, reduce over time. Currently the proportion of loans having state
government guarantees is 27 per cent. Nevertheless, use of fallback mechanisms such
as an escrow account has been minimal. m In respect of private sector loans, REC has asset protection mechanisms such as pari
passu charge on the relevant project assets, trust and retention account, collaterals
such as personal/corporate guarantees, and pledges of shares held by the promoters.l Private sector projects increasingly face challenges such as fuel availability, power
purchase agreements with SPUs for assured power offtake, and uncertainties related to
regulatory clearance. REC has also revised its loan policies in light of the changing
dynamics in the sector:m REC insists that projects have coal and water linkages, and land for the main plant
area, before disbursing loansm REC also insists that reasonable tariff is quoted, and that power purchase agreements
have clauses for passing on any rise in fuel prices.
REC has maintained a good collection performance till date. CRISIL, however, believes that
asset quality pressures may intensify in future if deterioration in the performance of SPUs is
not arrested. Additionally, given the high concentration risk, financial stress on any of these
borrowers could lead to significant increase in NPA levels for REC. While CRISIL does not expect
significant impairment in REC's lending portfolio in the near term, its underwriting and credit
monitoring mechanisms, and the financial health of SPUs will be key monitorables over the
medium term.
CRISIL has analysed REC's state-wise SPU exposures (refer to Annexure I for details) and
classified these exposures based on risk levels. The risk levels were identified based on the
performance of the distribution companies, and applied to the total exposure to the state on
account of linkages among generation, transmission, and distribution companies.
Given the politically sensitive nature of electricity and the fact that SPUs operate as an arm of
5. REC has reported low gross NPAs. How does CRISIL analyse inherent risks in REC's
portfolio?
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
61
REC also has a strong pipeline of undisbursed sanctions. Given the large volume of financing
required in the power sector, and the fact that banks focus on multiple sectors, CRISIL believes
that REC will maintain its strong competitive position in this space. This is reflected in the fact
that REC's loan portfolio is about three times the size of the power sector portfolio of India's
largest bank. Also, banks are focused on specific tenors (of less than five years) and segments
(mostly private generation projects). This enhances REC's role as one of the main providers of
finance to the power sector, particularly SPUs.
REC faces asset quality challenges on account of three main factors:l Weak financial risk profiles of the largest borrower segment - SPUs (around 83 per cent of
its advances were to SPUs as on March 31, 2011, as against 85 per cent as on March 31,
2009), l Sectoral concentration l Key account concentration, which may lead to large exposures turning into non-
performing assets (NPAs); the top 10 borrowers accounted for about 46.5 per cent of
REC's advances as on March 31, 2011, as against 45 per cent as on March 31, 2009.
The first of these is the most critical, while the second will continue to exist given the mandate.
REC, nevertheless, has been able to mitigate these risks and maintain low gross NPAs (of 0.02
per cent as on March 31, 2011) and healthy collection efficiency. Its collection efficiency has
remained high (at around 99 per cent on average) in the past three years. This is owing to its
criticality to borrowers and the asset protection mechanisms in place.l REC halts any further disbursement on a facility if there is delay by the borrower in
payment on another facility. SPUs, therefore, delay payments to REC only as a last resort,
because lack of access to REC funding will substantially curb their operations and lead to
increase in interest payment on the entire debt availed of from REC. As on March 31, 2011,
most of REC's NPAs were from the private sector.l Additionally, REC has set in place several asset protection mechanisms for state/central
sector and private borrowers.m Advances to the central and state sector are generally secured either through a charge
on project assets, or by a state government guarantee, or both. In addition, as on
4. Given REC's significant exposure to SPUs and the high sectoral and customer
concentration, how does it manage the asset quality risks in its portfolio?
March 31, 2011, about 80 per cent of outstanding loans to the state and central power
sector involved an escrow mechanism. However, state government guarantees will
not be extended henceforth, and the proportion of loans covered by such a guarantee
may, therefore, reduce over time. Currently the proportion of loans having state
government guarantees is 27 per cent. Nevertheless, use of fallback mechanisms such
as an escrow account has been minimal. m In respect of private sector loans, REC has asset protection mechanisms such as pari
passu charge on the relevant project assets, trust and retention account, collaterals
such as personal/corporate guarantees, and pledges of shares held by the promoters.l Private sector projects increasingly face challenges such as fuel availability, power
purchase agreements with SPUs for assured power offtake, and uncertainties related to
regulatory clearance. REC has also revised its loan policies in light of the changing
dynamics in the sector:m REC insists that projects have coal and water linkages, and land for the main plant
area, before disbursing loansm REC also insists that reasonable tariff is quoted, and that power purchase agreements
have clauses for passing on any rise in fuel prices.
REC has maintained a good collection performance till date. CRISIL, however, believes that
asset quality pressures may intensify in future if deterioration in the performance of SPUs is
not arrested. Additionally, given the high concentration risk, financial stress on any of these
borrowers could lead to significant increase in NPA levels for REC. While CRISIL does not expect
significant impairment in REC's lending portfolio in the near term, its underwriting and credit
monitoring mechanisms, and the financial health of SPUs will be key monitorables over the
medium term.
CRISIL has analysed REC's state-wise SPU exposures (refer to Annexure I for details) and
classified these exposures based on risk levels. The risk levels were identified based on the
performance of the distribution companies, and applied to the total exposure to the state on
account of linkages among generation, transmission, and distribution companies.
Given the politically sensitive nature of electricity and the fact that SPUs operate as an arm of
5. REC has reported low gross NPAs. How does CRISIL analyse inherent risks in REC's
portfolio?
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
63
the respective state governments, CRISIL believes that the state governments will continue to
support the SPUs in making payments to REC. REC has substantial exposure to high-risk SPUs.
Nevertheless, the ability of state governments to support SPUs mitigates asset quality risks on
these exposures. CRISIL has, therefore, mapped these exposures against state finances to
arrive at a risk matrix that identifies the ultimate risk in REC's loan book (refer to CRISIL article
'Credit quality of power sector lenders - potential risks ahead' for methodology).
Chart 5: Risk matrix of SPU exposures
CRISIL has, thus, classified REC's SPU exposures as follows:
Table 1: Risk classification of REC's SPU exposures
CRISIL analyses potential slippages from the highest and high risk portfolios and the private
sector exposure to estimate the adequacy of capital to cover these asset-side risks and the
impact on earnings should the risks materialise.
REC's NPA recognition norms differ from those of banks in two aspects:l REC recognises NPAs at 180 days-past-due (dpd), while banks do so at 90-dpd. l For loans to SPUs, REC recognises NPAs facility-wise - in other words, only those facilities
that are 180-dpd are classified as NPAs; banks on the other hand classify all facilities of the
borrower as NPAs if any one facility has breached the 90-dpd mark.
For REC's exposures to the private sector, while NPAs are recognised at 180-dpd, any
individual facility turning into a NPA will lead to the entire exposure to that specific entity
being classified as NPA.
To estimate REC's gross NPA levels as consistent with banking norms, CRISIL has considered
REC's total exposure to borrowers with overdues of 90 days and more. This amounts to Rs.2.96
billion. Therefore, even if the banking NPA recognition norms were applied to REC, its gross
NPA levels are unlikely to increase significantly. Adjusted gross NPAs would stand at less than
0.5 per cent as on March 31, 2011, against the banking industry gross NPA average of 2.3 per
cent.
6. How will REC's gross NPA levels be affected if banks' NPA recognition norms were
applied to REC?
Exposure in Rs. Billion Share in total SPU exposure
Highest Risk 229.1 36.7%
High Risk 236.1 37.9%
Moderate Risk 157.2 25.2%
Low Risk 1.4 0.2%
Total SPU exposure 623.5 100.0%
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Cluster IV(Lowest)
Himachal PradeshWest Bengal
BiharJammu & KashmirNorth Eastern States (excluding Assam)
Cluster IIIKerala
Uttarakhand
JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh
AssamOrissa
Cluster IIGoa
GujaratChhattisgarhMaharashtra
Andhra PradeshHaryanaTamil Nadu
Cluster I (Highest)
Delhi Karnataka
Low Risk Moderate Risk High Risk
Risk profile of State Power Utilities
Stat
e G
ove
rnm
ent
abili
ty t
o s
up
po
rt
Highest Risk Moderate RiskHigh Risk Low Risk
63
the respective state governments, CRISIL believes that the state governments will continue to
support the SPUs in making payments to REC. REC has substantial exposure to high-risk SPUs.
Nevertheless, the ability of state governments to support SPUs mitigates asset quality risks on
these exposures. CRISIL has, therefore, mapped these exposures against state finances to
arrive at a risk matrix that identifies the ultimate risk in REC's loan book (refer to CRISIL article
'Credit quality of power sector lenders - potential risks ahead' for methodology).
Chart 5: Risk matrix of SPU exposures
CRISIL has, thus, classified REC's SPU exposures as follows:
Table 1: Risk classification of REC's SPU exposures
CRISIL analyses potential slippages from the highest and high risk portfolios and the private
sector exposure to estimate the adequacy of capital to cover these asset-side risks and the
impact on earnings should the risks materialise.
REC's NPA recognition norms differ from those of banks in two aspects:l REC recognises NPAs at 180 days-past-due (dpd), while banks do so at 90-dpd. l For loans to SPUs, REC recognises NPAs facility-wise - in other words, only those facilities
that are 180-dpd are classified as NPAs; banks on the other hand classify all facilities of the
borrower as NPAs if any one facility has breached the 90-dpd mark.
For REC's exposures to the private sector, while NPAs are recognised at 180-dpd, any
individual facility turning into a NPA will lead to the entire exposure to that specific entity
being classified as NPA.
To estimate REC's gross NPA levels as consistent with banking norms, CRISIL has considered
REC's total exposure to borrowers with overdues of 90 days and more. This amounts to Rs.2.96
billion. Therefore, even if the banking NPA recognition norms were applied to REC, its gross
NPA levels are unlikely to increase significantly. Adjusted gross NPAs would stand at less than
0.5 per cent as on March 31, 2011, against the banking industry gross NPA average of 2.3 per
cent.
6. How will REC's gross NPA levels be affected if banks' NPA recognition norms were
applied to REC?
Exposure in Rs. Billion Share in total SPU exposure
Highest Risk 229.1 36.7%
High Risk 236.1 37.9%
Moderate Risk 157.2 25.2%
Low Risk 1.4 0.2%
Total SPU exposure 623.5 100.0%
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
Cluster IV(Lowest)
Himachal PradeshWest Bengal
BiharJammu & KashmirNorth Eastern States (excluding Assam)
Cluster IIIKerala
Uttarakhand
JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh
AssamOrissa
Cluster IIGoa
GujaratChhattisgarhMaharashtra
Andhra PradeshHaryanaTamil Nadu
Cluster I (Highest)
Delhi Karnataka
Low Risk Moderate Risk High Risk
Risk profile of State Power Utilities
Stat
e G
ove
rnm
ent
abili
ty t
o s
up
po
rt
Highest Risk Moderate RiskHigh Risk Low Risk
7. Does the wholesale resource profile of REC add any risks to its business profile? How
does REC manage its asset-liability management (ALM) profile?While REC's resource profile is wholesale in nature, this does not add significant risks to its
business profile as REC is able to manage this well. REC's instruments have wide market
acceptability, as reflected in their diversified investor base with a long-term investment
horizon, including Life Insurance Corporation of India (LIC), pension funds, and gratuity funds.
Other investors include mutual funds, banks, and retail investors (for 54EC capital gains bonds,
and infrastructure bonds). This allows REC to borrow at low spreads over G-Secs. RECs
resource profile is also supported by its ability to raise low-cost funds through capital gains
bonds. Its cost of borrowing declined marginally to 7.7 per cent in 2010-11 from 7.8 per cent in
2009-10.
Table 2: REC's resource profile
Chart 6: Borrowing profile as on March 31, 2011
65
Amount % Amount % Amount %
Capital Gains bonds 113 16.2 99 17.8 144 32.0
Institutional Bonds 399 57.0 309 55.2 182 40.6
Banks, FI, CP etc 112 16.0 106 18.9 95 21.2
Foreign Currency 76 10.8 21 3.7 15 3.3
CP - - 25 4.4 13 2.9
Total 700 100.0 560 100.0 449 100.0
Borrowing Costs (%) 7.7 7.8 7.3
2011 2010 2009
As seen in Chart 6, bonds constituted around 57 per cent of REC's outstanding borrowings as
on March 31, 2011, and are usually subscribed to by long-term investors such as LIC, pension
and gratuity funds, and insurance companies. REC also has a sizeable proportion of retail
funding given that it raises low-cost capital gains bonds (around 16 per cent) under Section
54EC of Income Tax Act, 1961. REC's reliance on bank borrowings (around 16 per cent) is not
very high. Therefore, the dependence on banks, which are also lenders to the power sector, is
low.
Furthermore, during 2010-11, REC's resource profile was supported by the substantially
higher funds raised through foreign currency borrowings; REC raised Rs.57.0 billion in 2010-11
as against Rs.6.1 billion in 2009-10 through foreign currency borrowings. Accordingly, foreign
currency borrowings constituted about 11 per cent of REC's total borrowings as on March 31,
2011 (about 4 per cent as on March 31, 2010). Additionally, REC was granted infrastructure
financing non-banking finance company (NBFC-IFC) status in 2010-11. This has increased its
flexibility to raise more funds through foreign currency borrowings at lower costs (up to 50 per
cent of its net worth, subject to a limit of USD500 million per year under the automatic route
as compared to the approval route earlier) to manage its resource profile. REC has a policy of
hedging risks associated with foreign currency borrowings for a significant portion of such
borrowings, while the remaining portion is left unhedged and remains exposed to the risk of
depreciation. While REC has internal limits for such unhedged exposure, and regularly
monitors such positions, any adverse movement in foreign exchange or interest rates may
constrain the corporation's earnings, especially if the proportion of unhedged foreign
currency borrowings is high.
Additionally, upon being classified as an NBFC-IFC, banks' exposure limit to REC has increased
by 5 per cent of their capital funds. The risk weight for exposure to REC is linked to its credit
rating and is significantly lower; this is expected to translate into lower cost of funds through
bank borrowings.
REC's resource profile is likely to remain wholesale in nature as it needs to raise long-term
funds to ensure adequate matching of its assets and liabilities; this is primarily driven by the
long tenure of its advances. Most retail funding sources have relatively shorter maturity. As on
March 31, 2011, the average tenures of its outstanding loans and borrowings were around six
years and five years, respectively.
Rs. Bn.
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10.8%16.2%
16.0%
Bonds Banks, FI’s Capital gains bonds Foreign
57.0%
7. Does the wholesale resource profile of REC add any risks to its business profile? How
does REC manage its asset-liability management (ALM) profile?While REC's resource profile is wholesale in nature, this does not add significant risks to its
business profile as REC is able to manage this well. REC's instruments have wide market
acceptability, as reflected in their diversified investor base with a long-term investment
horizon, including Life Insurance Corporation of India (LIC), pension funds, and gratuity funds.
Other investors include mutual funds, banks, and retail investors (for 54EC capital gains bonds,
and infrastructure bonds). This allows REC to borrow at low spreads over G-Secs. RECs
resource profile is also supported by its ability to raise low-cost funds through capital gains
bonds. Its cost of borrowing declined marginally to 7.7 per cent in 2010-11 from 7.8 per cent in
2009-10.
Table 2: REC's resource profile
Chart 6: Borrowing profile as on March 31, 2011
65
Amount % Amount % Amount %
Capital Gains bonds 113 16.2 99 17.8 144 32.0
Institutional Bonds 399 57.0 309 55.2 182 40.6
Banks, FI, CP etc 112 16.0 106 18.9 95 21.2
Foreign Currency 76 10.8 21 3.7 15 3.3
CP - - 25 4.4 13 2.9
Total 700 100.0 560 100.0 449 100.0
Borrowing Costs (%) 7.7 7.8 7.3
2011 2010 2009
As seen in Chart 6, bonds constituted around 57 per cent of REC's outstanding borrowings as
on March 31, 2011, and are usually subscribed to by long-term investors such as LIC, pension
and gratuity funds, and insurance companies. REC also has a sizeable proportion of retail
funding given that it raises low-cost capital gains bonds (around 16 per cent) under Section
54EC of Income Tax Act, 1961. REC's reliance on bank borrowings (around 16 per cent) is not
very high. Therefore, the dependence on banks, which are also lenders to the power sector, is
low.
Furthermore, during 2010-11, REC's resource profile was supported by the substantially
higher funds raised through foreign currency borrowings; REC raised Rs.57.0 billion in 2010-11
as against Rs.6.1 billion in 2009-10 through foreign currency borrowings. Accordingly, foreign
currency borrowings constituted about 11 per cent of REC's total borrowings as on March 31,
2011 (about 4 per cent as on March 31, 2010). Additionally, REC was granted infrastructure
financing non-banking finance company (NBFC-IFC) status in 2010-11. This has increased its
flexibility to raise more funds through foreign currency borrowings at lower costs (up to 50 per
cent of its net worth, subject to a limit of USD500 million per year under the automatic route
as compared to the approval route earlier) to manage its resource profile. REC has a policy of
hedging risks associated with foreign currency borrowings for a significant portion of such
borrowings, while the remaining portion is left unhedged and remains exposed to the risk of
depreciation. While REC has internal limits for such unhedged exposure, and regularly
monitors such positions, any adverse movement in foreign exchange or interest rates may
constrain the corporation's earnings, especially if the proportion of unhedged foreign
currency borrowings is high.
Additionally, upon being classified as an NBFC-IFC, banks' exposure limit to REC has increased
by 5 per cent of their capital funds. The risk weight for exposure to REC is linked to its credit
rating and is significantly lower; this is expected to translate into lower cost of funds through
bank borrowings.
REC's resource profile is likely to remain wholesale in nature as it needs to raise long-term
funds to ensure adequate matching of its assets and liabilities; this is primarily driven by the
long tenure of its advances. Most retail funding sources have relatively shorter maturity. As on
March 31, 2011, the average tenures of its outstanding loans and borrowings were around six
years and five years, respectively.
Rs. Bn.
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
10.8%16.2%
16.0%
Bonds Banks, FI’s Capital gains bonds Foreign
57.0%
67
REC has a comfortable ALM profile, as reflected in its adequate negative mismatches. As on
March 31, 2011, on a principal-only basis, the cumulative negative mismatches in the
maturity buckets of up to March 31, 2012, were around 7 per cent of its cumulative outflows
up to the end of March 2012. REC's Asset Liability Management Committee continuously
monitors the ALM position and additional borrowings are done with the negative mismatches
under consideration. REC also prepares a quarterly cash flow statement to monitor liquidity.
Furthermore, the ALM position is supported by low reliance on short-term debt; short-term
debt constituted less than 5 per cent of the total borrowings during the past three years. REC
also maintains unutilised banks lines to cover for any short-term liquidity requirements in
maturity buckets of up to 45 days.
Since REC is notified as a public financial institution, it is currently exempted from compliance
with most of the prudential norms applicable to NBFCs. However, upon being classified as an
NBFC-IFC, REC's regulatory framework is gradually converging with those applicable to other
NBFC-IFCs. REC also has its own internal guidelines, many of which already comply with the
regulatory norms applicable to NBFCs, although not entirely (refer to Annexure II for details).
REC's regulatory dispensation differs from that of other financiers in the following aspects:l REC's exposure norms with respect to lending to SPUs are higher than those applicable to
NBFC-IFCs and banks; this allows REC to retain its sector focus. l REC's NPA recognition norms are less stringent than those of banks and NBFC-IFCs,
resulting in lower reported gross NPAs.l Standard asset provisioning is not applicable for REC.
REC is formulating a roadmap (in consultation with MoP) for submission to the Reserve Bank
of India (RBI) by March 31, 2012, setting out the manner in which it intends to comply with RBI
prudential norms. Additionally, RBI, in its various reports, has indicated that it is reexamining
the exemptions granted to government-owned NBFCs. Hence, many of the regulatory
concessions currently available to REC may be phased out gradually over the medium term.
Given REC's comfortable capitalisation and earnings profile, CRISIL believes that REC will
comply with the stringent regulatory norms applicable to NBFC-IFCs, barring exposure norms.
8. How does REC's regulatory dispensation differ from those of other financiers?
9. Will the capital position of REC be adequate to absorb shocks to its asset quality?REC has comfortable capitalisation with a net worth of Rs.127.9 billion as on March 31, 2011.
Its Tier I and overall CAR were at 18.04 per cent and 19.09 per cent, respectively, as on March
31, 2011. Being classified as NBFC-IFC, REC is required to maintain minimum Tier I and overall
CAR of 10 per cent and 15 per cent, respectively. Its gearing remains adequate, at around 5.5
times as on March 31, 2011 (5 times as on March 31, 2010). REC's capitalisation is supported
by healthy accruals to net worth as reflected in the three-year average return on net worth
ratio of 22.2 per cent. CRISIL believes that REC's accruals will remain comfortable over the
medium term, driven by its ability to maintain stable interest spreads. Furthermore, the
management intends to maintain a minimum Tier I CAR of around 17 per cent on a steady
state basis over the medium term.
Additionally, REC has flexibility to raise additional equity capital by diluting GoI's shareholding
(currently at around 66.8 per cent) to support its growth plans over the medium term; REC can
raise around Rs.52 billion through dilution of GoI holding to 51 per cent at current market
prices.
CRISIL has analysed the adequacy of capital under two scenarios (refer to CRISIL article 'Power
distribution utilities- current issues and what lies ahead’ for details), based on REC's asset
quality risks, taking into account the risk classification of REC's SPU exposures (refer to Chart 5)
and the expected stress on its private sector exposures.l In the base case, CRISIL assumed slippages of 10 per cent from the highest risk SPU
portfolio, 5 per cent from the high risk portfolio, and 5 per cent from the private sector
portfolio. l The stress scenario assumed slippages of 30 per cent from the highest risk SPU portfolio,
10 per cent from the high risk portfolio, and 10 per cent from the private sector portfolio.
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
67
REC has a comfortable ALM profile, as reflected in its adequate negative mismatches. As on
March 31, 2011, on a principal-only basis, the cumulative negative mismatches in the
maturity buckets of up to March 31, 2012, were around 7 per cent of its cumulative outflows
up to the end of March 2012. REC's Asset Liability Management Committee continuously
monitors the ALM position and additional borrowings are done with the negative mismatches
under consideration. REC also prepares a quarterly cash flow statement to monitor liquidity.
Furthermore, the ALM position is supported by low reliance on short-term debt; short-term
debt constituted less than 5 per cent of the total borrowings during the past three years. REC
also maintains unutilised banks lines to cover for any short-term liquidity requirements in
maturity buckets of up to 45 days.
Since REC is notified as a public financial institution, it is currently exempted from compliance
with most of the prudential norms applicable to NBFCs. However, upon being classified as an
NBFC-IFC, REC's regulatory framework is gradually converging with those applicable to other
NBFC-IFCs. REC also has its own internal guidelines, many of which already comply with the
regulatory norms applicable to NBFCs, although not entirely (refer to Annexure II for details).
REC's regulatory dispensation differs from that of other financiers in the following aspects:l REC's exposure norms with respect to lending to SPUs are higher than those applicable to
NBFC-IFCs and banks; this allows REC to retain its sector focus. l REC's NPA recognition norms are less stringent than those of banks and NBFC-IFCs,
resulting in lower reported gross NPAs.l Standard asset provisioning is not applicable for REC.
REC is formulating a roadmap (in consultation with MoP) for submission to the Reserve Bank
of India (RBI) by March 31, 2012, setting out the manner in which it intends to comply with RBI
prudential norms. Additionally, RBI, in its various reports, has indicated that it is reexamining
the exemptions granted to government-owned NBFCs. Hence, many of the regulatory
concessions currently available to REC may be phased out gradually over the medium term.
Given REC's comfortable capitalisation and earnings profile, CRISIL believes that REC will
comply with the stringent regulatory norms applicable to NBFC-IFCs, barring exposure norms.
8. How does REC's regulatory dispensation differ from those of other financiers?
9. Will the capital position of REC be adequate to absorb shocks to its asset quality?REC has comfortable capitalisation with a net worth of Rs.127.9 billion as on March 31, 2011.
Its Tier I and overall CAR were at 18.04 per cent and 19.09 per cent, respectively, as on March
31, 2011. Being classified as NBFC-IFC, REC is required to maintain minimum Tier I and overall
CAR of 10 per cent and 15 per cent, respectively. Its gearing remains adequate, at around 5.5
times as on March 31, 2011 (5 times as on March 31, 2010). REC's capitalisation is supported
by healthy accruals to net worth as reflected in the three-year average return on net worth
ratio of 22.2 per cent. CRISIL believes that REC's accruals will remain comfortable over the
medium term, driven by its ability to maintain stable interest spreads. Furthermore, the
management intends to maintain a minimum Tier I CAR of around 17 per cent on a steady
state basis over the medium term.
Additionally, REC has flexibility to raise additional equity capital by diluting GoI's shareholding
(currently at around 66.8 per cent) to support its growth plans over the medium term; REC can
raise around Rs.52 billion through dilution of GoI holding to 51 per cent at current market
prices.
CRISIL has analysed the adequacy of capital under two scenarios (refer to CRISIL article 'Power
distribution utilities- current issues and what lies ahead’ for details), based on REC's asset
quality risks, taking into account the risk classification of REC's SPU exposures (refer to Chart 5)
and the expected stress on its private sector exposures.l In the base case, CRISIL assumed slippages of 10 per cent from the highest risk SPU
portfolio, 5 per cent from the high risk portfolio, and 5 per cent from the private sector
portfolio. l The stress scenario assumed slippages of 30 per cent from the highest risk SPU portfolio,
10 per cent from the high risk portfolio, and 10 per cent from the private sector portfolio.
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Table 3: Analysis of adequacy of capital to cover asset-side risks
As seen in the table above, under the base case scenario, REC is expected to manage the
increased asset quality challenges. Its net worth coverage for exposure at risk is adequate, at
about 3.3 times. However, under the stress case scenario, its net worth coverage for exposure
at risk is likely to be low, at around 1.3 times, and REC will require additional capital to maintain
adequate coverage for the increased NPAs.
REC has managed its profitability through interest rate cycles. Its net profitability margin 1(NPM ; on a yearly average basis) was 3.1 per cent in 2010-11 (2.9 per cent in the previous
year) and was driven by stable interest spreads (3.0 per cent in 2010-11 and 2009-10). REC's
profitability has also been supported by low operating expenses ratio (0.2 per cent in 2010-11
and 2009-10), unlike banks and NBFCs which have relatively higher operating expenses
because of their large branch network and employee costs.
Table 4: Net profitability margin trend
10 Will REC's profitability be under pressure in 2011-12, given the sharp increase in
borrowing costs over the past few months and increased competition from banks in this
lending space? What is the likely increase in provisioning requirement?
69
Base Case Scenario Stress Case Scenario
Exposure at Risk
- Highest risk portfolio Rs. Bn. 22.9 68.7
- High risk portfolio Rs. Bn. 11.8 23.6
- Private sector Rs. Bn. 3.9 7.8
Total exposure at risk Rs. Bn. 38.6 100.1
Exposure at risk Per cent 4.7 12.3
Net worth as on March 31, 2011 Rs. Bn. 127.9 127.9
Net worth / Exposure at risk Times 3.3 1.3
For the year 2010-11 2009-10 2008-09 2007-08
Yield on funds deployed 10.7 10.8 10.1 9.3
Cost of Borrowings 7.7 7.8 7.3 6.4
Interest Spread 3.0 3.0 2.8 2.9
Fee Income 0.2 0.2 0.2 0.0
Operating Expenses 0.2 0.2 0.2 0.3
Net Profitability Margin (pre-credit costs) 3.1 2.9 2.8 2.7
REC's profitability is expected to remain comfortable in 2011-12 and its interest spreads are
likely to remain at current levels. While REC's borrowing costs may increase in 2011-12
because of hardening interest rates, its net interest spread is likely to remain comfortable,
given its ability to pass on a major part of the increase in borrowing costs in the form of higher
yields. REC's operating expenses ratio is also likely to remain at the current level, supporting its
earnings profile.
REC's profitability has improved in the past few years driven by its ability to maintain stable
interest spreads due to a three-year interest reset clause on its long-term loans. Furthermore,
REC is expected to maintain strong pricing power over the medium term given the large
financing requirements for the power sector.
Despite rising interest rate scenario, REC has been able to manage its borrowing costs
primarily because of the sizeable proportion of funds raised through external commercial
borrowings and capital gains bonds at relatively lower costs. Its cost of borrowings was around
7.7 per cent in 2010-11 (7.8 per cent for 2009-10). CRISIL believes that REC will continue to
benefit from its ability to maintain competitive borrowing costs driven by factors such as its
ability to raise large proportion of funds at relatively low costs, and wide market acceptability
for its instruments.
Competition from banks is unlikely to increase materially over the next few years. The
competition between banks and REC has not resulted in irrational pricing by either. The
differential in interest rates charged by banks and REC is usually between 25 and 50 basis
points.
While REC is currently exempt from standard assets provisioning requirements applicable for
NBFCs, its profits may reduce by less than 10 per cent (about Rs.2.5 billion) of the expected PAT
for 2011-12, if required to make provisions on the outstanding loans as on March 31, 2012.
Another risk to REC's earnings may arise from the unhedged portion of its foreign currency
borrowings.
CRISIL has also analysed the impact of potential increase in provisioning requirement on REC's
earnings profile arising from inherent asset quality challenges (refer to Table 5); REC had
exposure at risk of about Rs.38.6 billion (base case scenario) and Rs.100.1 billion (stress case
scenario) as on March 31, 2011. The analysis indicates that REC will maintain adequate
earnings profile even under stress conditions. 1 CRISIL uses NPM to analyse the core profitability of financing entities. NPM is defined as (Yield on funds deployed) - (Average
borrowing costs) - (Operating expense ratio) + (Fee income levels).
In per cent
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
Table 3: Analysis of adequacy of capital to cover asset-side risks
As seen in the table above, under the base case scenario, REC is expected to manage the
increased asset quality challenges. Its net worth coverage for exposure at risk is adequate, at
about 3.3 times. However, under the stress case scenario, its net worth coverage for exposure
at risk is likely to be low, at around 1.3 times, and REC will require additional capital to maintain
adequate coverage for the increased NPAs.
REC has managed its profitability through interest rate cycles. Its net profitability margin 1(NPM ; on a yearly average basis) was 3.1 per cent in 2010-11 (2.9 per cent in the previous
year) and was driven by stable interest spreads (3.0 per cent in 2010-11 and 2009-10). REC's
profitability has also been supported by low operating expenses ratio (0.2 per cent in 2010-11
and 2009-10), unlike banks and NBFCs which have relatively higher operating expenses
because of their large branch network and employee costs.
Table 4: Net profitability margin trend
10 Will REC's profitability be under pressure in 2011-12, given the sharp increase in
borrowing costs over the past few months and increased competition from banks in this
lending space? What is the likely increase in provisioning requirement?
69
Base Case Scenario Stress Case Scenario
Exposure at Risk
- Highest risk portfolio Rs. Bn. 22.9 68.7
- High risk portfolio Rs. Bn. 11.8 23.6
- Private sector Rs. Bn. 3.9 7.8
Total exposure at risk Rs. Bn. 38.6 100.1
Exposure at risk Per cent 4.7 12.3
Net worth as on March 31, 2011 Rs. Bn. 127.9 127.9
Net worth / Exposure at risk Times 3.3 1.3
For the year 2010-11 2009-10 2008-09 2007-08
Yield on funds deployed 10.7 10.8 10.1 9.3
Cost of Borrowings 7.7 7.8 7.3 6.4
Interest Spread 3.0 3.0 2.8 2.9
Fee Income 0.2 0.2 0.2 0.0
Operating Expenses 0.2 0.2 0.2 0.3
Net Profitability Margin (pre-credit costs) 3.1 2.9 2.8 2.7
REC's profitability is expected to remain comfortable in 2011-12 and its interest spreads are
likely to remain at current levels. While REC's borrowing costs may increase in 2011-12
because of hardening interest rates, its net interest spread is likely to remain comfortable,
given its ability to pass on a major part of the increase in borrowing costs in the form of higher
yields. REC's operating expenses ratio is also likely to remain at the current level, supporting its
earnings profile.
REC's profitability has improved in the past few years driven by its ability to maintain stable
interest spreads due to a three-year interest reset clause on its long-term loans. Furthermore,
REC is expected to maintain strong pricing power over the medium term given the large
financing requirements for the power sector.
Despite rising interest rate scenario, REC has been able to manage its borrowing costs
primarily because of the sizeable proportion of funds raised through external commercial
borrowings and capital gains bonds at relatively lower costs. Its cost of borrowings was around
7.7 per cent in 2010-11 (7.8 per cent for 2009-10). CRISIL believes that REC will continue to
benefit from its ability to maintain competitive borrowing costs driven by factors such as its
ability to raise large proportion of funds at relatively low costs, and wide market acceptability
for its instruments.
Competition from banks is unlikely to increase materially over the next few years. The
competition between banks and REC has not resulted in irrational pricing by either. The
differential in interest rates charged by banks and REC is usually between 25 and 50 basis
points.
While REC is currently exempt from standard assets provisioning requirements applicable for
NBFCs, its profits may reduce by less than 10 per cent (about Rs.2.5 billion) of the expected PAT
for 2011-12, if required to make provisions on the outstanding loans as on March 31, 2012.
Another risk to REC's earnings may arise from the unhedged portion of its foreign currency
borrowings.
CRISIL has also analysed the impact of potential increase in provisioning requirement on REC's
earnings profile arising from inherent asset quality challenges (refer to Table 5); REC had
exposure at risk of about Rs.38.6 billion (base case scenario) and Rs.100.1 billion (stress case
scenario) as on March 31, 2011. The analysis indicates that REC will maintain adequate
earnings profile even under stress conditions. 1 CRISIL uses NPM to analyse the core profitability of financing entities. NPM is defined as (Yield on funds deployed) - (Average
borrowing costs) - (Operating expense ratio) + (Fee income levels).
In per cent
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
Table 5: Earnings impact of asset quality pressure (in Rs. Billion)
71
Base Case Scenario Stress Case Scenario
Exposure at risk 38.6 100.1
Provisions @10% for exposure at risk 3.9 10
Revised PBT for 2010-11 30.9 24.8
Revised PAT for 2010-11 22.8 18.7
Decline in PAT for 2010-11 (per cent) 11% 27%
Revised RoA (per cent) 3.0% 2.5%
Annexure I: Break-up of RECs State-wise SPU exposures
REC's SPU Exposure in Rs. Billion
Maharashtra 126.0
Rajasthan 87.1
Tamil Nadu 80.1
Andhra Pradesh 78.8
Uttar Pradesh 59.6
Punjab 54.8
Haryana 48.7
West Bengal 22.7
Chhattisgarh 11.6
Karnataka 11.5
Jharkhand 6.9
Madhya Pradesh 6.3
Jammu& Kashmir 5.8
Bihar 4.6
Uttarakhand 4.4
Kerala 3.6
Himachal Pradesh 2.9
Meghalaya 2.9
Assam 1.8
Manipur 1.2
Gujarat 1.1
Orissa 1.1
Others 57.4
Total 680.9
SPU
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
Table 5: Earnings impact of asset quality pressure (in Rs. Billion)
71
Base Case Scenario Stress Case Scenario
Exposure at risk 38.6 100.1
Provisions @10% for exposure at risk 3.9 10
Revised PBT for 2010-11 30.9 24.8
Revised PAT for 2010-11 22.8 18.7
Decline in PAT for 2010-11 (per cent) 11% 27%
Revised RoA (per cent) 3.0% 2.5%
Annexure I: Break-up of RECs State-wise SPU exposures
REC's SPU Exposure in Rs. Billion
Maharashtra 126.0
Rajasthan 87.1
Tamil Nadu 80.1
Andhra Pradesh 78.8
Uttar Pradesh 59.6
Punjab 54.8
Haryana 48.7
West Bengal 22.7
Chhattisgarh 11.6
Karnataka 11.5
Jharkhand 6.9
Madhya Pradesh 6.3
Jammu& Kashmir 5.8
Bihar 4.6
Uttarakhand 4.4
Kerala 3.6
Himachal Pradesh 2.9
Meghalaya 2.9
Assam 1.8
Manipur 1.2
Gujarat 1.1
Orissa 1.1
Others 57.4
Total 680.9
SPU
Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
73Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
Annexure II- Regulatory Framework for Banks, IFCs and REC
S. No Parameter Banks IFCs REC Comments
1 Exposure Limits
Lending to single borrower
20% of capital funds for infra exposures
25% of owned funds
i. 100% of net worth for non-integrated utilities* and where more than one distribution companies [DISCOMs] have been formed), or State Government/Central Government power sector PSUs ii. 200% of net worth for DISCOMs where there is only one DISCOM iii. 250% of net worth for integrated SPUs iv. 50% of net worth for Central/State/Joint sector borrower (other than that covered in i to iii above) v For private projects/utilities, REC follows RBI guidelines i.e. single and group borrower limit of 25% and 40%, respectively of owned funds.
Exposure norms for SPUs higher than that for IFCs and banks allows them to grow their book and maintain competitiveness. However, it also results in higher concentration risks.Lending to a single
group of borrowers40% of owned funds
2 NPA recognition
Days past due (dpd) NPA recognition at 90+ dpd
NPA recognition at 180+ dpd
NPA recognition at 180+ dpd. If banks' NPA recognition norms were followed, GNPA would be less than 0.5%
Facility wise / Borrower wise
Borrower wise (i.e. all the loans of the borrower are classified as NPAs)
Loans to state/central entities are considered loan/facility wise. Loans to private sector entities are considered borrower wise
Provisioning requirements
For NPAsSubstandard Doubtful (> 3 years)Loss
15%25% to 100%100%
10%20% to 50%100%
10%20% to 50%100%
No material impact because of low GNPA levels
For standard assets 0.40% of standard assets (other than CRE, agri, SME, teaser loans)
0.25% of standard assets (w.e.f. March 2012)
Currently not applicable Profits (before tax) is expected to be lower by about Rs.2.5 Billion (< 10%) for 2011-12
4 Capital adequacy
Tier I CAR 6% 10% 10% No impact
Overall CAR 9% 15% 15% No impact
Risk weights Rating wise 100% 100% (except for state govt guaranteed exposures which carry 20%)
Existing norms in line with that applicable for NBFCs
5 Asset Liability Management
Limit on negative mismatches upto 30 days (as % of the cash outflows in the respective time buckets)
Next day 5%2-7 days 10%8-14 days 15%15-28 days 20%
1 to 30/31 days time-bucket should not exceed 15 % of outflows of each time-bucket and the cumulative gap upto 1 year period should not exceed 15% of the cumulative cash outflows upto 1 year.
REC's Asset Liability Management Committee continuously monitors the ALM position and additional borrowings are done with the mismatches under consideration. As on March 31, 2011, on a principal-only basis, the cumulative negative mismatches in the maturity buckets up to 1 year were around 7% of its cumulative outflows up to 1 year.
While there is no regulatory ALM limits, ALM position is comfortable with manageable level of mismatches and low dependence on ST borrowings
3
50% of capital funds forinfra exposures
*SPUs where generation, transmission and distribution functions have been trifurcated into separate companies
73Power Sector Lenders: Will the credit quality trip?
FAQs on Rural Electrification Corporation Limited
Annexure II- Regulatory Framework for Banks, IFCs and REC
S. No Parameter Banks IFCs REC Comments
1 Exposure Limits
Lending to single borrower
20% of capital funds for infra exposures
25% of owned funds
i. 100% of net worth for non-integrated utilities* and where more than one distribution companies [DISCOMs] have been formed), or State Government/Central Government power sector PSUs ii. 200% of net worth for DISCOMs where there is only one DISCOM iii. 250% of net worth for integrated SPUs iv. 50% of net worth for Central/State/Joint sector borrower (other than that covered in i to iii above) v For private projects/utilities, REC follows RBI guidelines i.e. single and group borrower limit of 25% and 40%, respectively of owned funds.
Exposure norms for SPUs higher than that for IFCs and banks allows them to grow their book and maintain competitiveness. However, it also results in higher concentration risks.Lending to a single
group of borrowers40% of owned funds
2 NPA recognition
Days past due (dpd) NPA recognition at 90+ dpd
NPA recognition at 180+ dpd
NPA recognition at 180+ dpd. If banks' NPA recognition norms were followed, GNPA would be less than 0.5%
Facility wise / Borrower wise
Borrower wise (i.e. all the loans of the borrower are classified as NPAs)
Loans to state/central entities are considered loan/facility wise. Loans to private sector entities are considered borrower wise
Provisioning requirements
For NPAsSubstandard Doubtful (> 3 years)Loss
15%25% to 100%100%
10%20% to 50%100%
10%20% to 50%100%
No material impact because of low GNPA levels
For standard assets 0.40% of standard assets (other than CRE, agri, SME, teaser loans)
0.25% of standard assets (w.e.f. March 2012)
Currently not applicable Profits (before tax) is expected to be lower by about Rs.2.5 Billion (< 10%) for 2011-12
4 Capital adequacy
Tier I CAR 6% 10% 10% No impact
Overall CAR 9% 15% 15% No impact
Risk weights Rating wise 100% 100% (except for state govt guaranteed exposures which carry 20%)
Existing norms in line with that applicable for NBFCs
5 Asset Liability Management
Limit on negative mismatches upto 30 days (as % of the cash outflows in the respective time buckets)
Next day 5%2-7 days 10%8-14 days 15%15-28 days 20%
1 to 30/31 days time-bucket should not exceed 15 % of outflows of each time-bucket and the cumulative gap upto 1 year period should not exceed 15% of the cumulative cash outflows upto 1 year.
REC's Asset Liability Management Committee continuously monitors the ALM position and additional borrowings are done with the mismatches under consideration. As on March 31, 2011, on a principal-only basis, the cumulative negative mismatches in the maturity buckets up to 1 year were around 7% of its cumulative outflows up to 1 year.
While there is no regulatory ALM limits, ALM position is comfortable with manageable level of mismatches and low dependence on ST borrowings
3
50% of capital funds forinfra exposures
*SPUs where generation, transmission and distribution functions have been trifurcated into separate companies
75Power Sector Lenders: Will the credit quality trip?
List of Rated Entities in the Power Sector
Segment Company Name
1 Power Generation Companies Aban Power Company Limited
2 Power Generation Companies Adani Power Limited
3 Power Generation Companies Adani Power Maharashtra Limited
4 Power Generation Companies Adani Power Rajasthan Limited
5 Power Generation Companies Aglar Power Limited
6 Power Generation Companies Amrit Bio-Energy & Industries Limited
7 Power Generation Companies Amrit Environmental Technologies Private Limited
8 Power Generation Companies Andhra Pradesh Power Generation Corporation Limited
9 Power Generation Companies Atria Brindavan Power Limited
10 Power Generation Companies Atria Power Corporation Limited
11 Power Generation Companies B L A Power Private Limited
12 Power Generation Companies Cauvery Hydro Energy Ltd.
13 Power Generation Companies Chhattisgarh Steel & Power Limited
14 Power Generation Companies Coastal Gujarat Power Limited
15 Power Generation Companies Damodar Valley Corporation
16 Power Generation Companies ETA Power Gen Private Limited
17 Power Generation Companies Gadhia Solar Energy Systems Private Limited
18 Power Generation Companies Ginni Global Pvt. Ltd.
19 Power Generation Companies Greenko Energies Private Limited
20 Power Generation Companies Gujarat Paguthan Energy Corporation Pvt. Ltd.
21 Power Generation Companies Haryana Power Generation Corporation Limited
22 Power Generation Companies Hul Hydro Power Private Limited
23 Power Generation Companies iEnergy Wind Farms (Theni) Private Limited
24 Power Generation Companies Jala Shakti Limited
25 Power Generation Companies Jhajjar Power Limited
26 Power Generation Companies Junagadh Power Projects Private Limited
27 Power Generation Companies Kaveri Gas Power Limited
28 Power Generation Companies Konaseema Gas Power Limited
29 Power Generation Companies Krishna Godavari Power Utilities Limited
30 Power Generation Companies Lanco Anpara Power Limited
31 Power Generation Companies Lanco Budhil Hydro Power Private Limited
32 Power Generation Companies Lanco Kondapalli Power Limited
33 Power Generation Companies Lanco Mandakini Hydro Energy Pvt. Ltd.
34 Power Generation Companies Lanco Power Limited
35 Power Generation Companies Lanco Teesta Hydro Power Private Limited
36 Power Generation Companies Lanco Vidarbha Thermal Power Limited
37 Power Generation Companies Malaxmi Wind Power
38 Power Generation Companies MMS Steel & Power Private Limited
39 Power Generation Companies Nagarjuna Hydro Energy Private Limited
40 Power Generation Companies Narayanpur Power Company Private Limited
41 Power Generation Companies Nava Bharat Ventures Limited.
42 Power Generation Companies Neyveli Lignite Corporation Limited
43 Power Generation Companies NHPC Limited
44 Power Generation Companies NTPC Limited
45 Power Generation Companies NTPC-SAIL Power Company Private Limited
A knowledge sharing endeavour from CRISIL
Insights
75Power Sector Lenders: Will the credit quality trip?
List of Rated Entities in the Power Sector
Segment Company Name
1 Power Generation Companies Aban Power Company Limited
2 Power Generation Companies Adani Power Limited
3 Power Generation Companies Adani Power Maharashtra Limited
4 Power Generation Companies Adani Power Rajasthan Limited
5 Power Generation Companies Aglar Power Limited
6 Power Generation Companies Amrit Bio-Energy & Industries Limited
7 Power Generation Companies Amrit Environmental Technologies Private Limited
8 Power Generation Companies Andhra Pradesh Power Generation Corporation Limited
9 Power Generation Companies Atria Brindavan Power Limited
10 Power Generation Companies Atria Power Corporation Limited
11 Power Generation Companies B L A Power Private Limited
12 Power Generation Companies Cauvery Hydro Energy Ltd.
13 Power Generation Companies Chhattisgarh Steel & Power Limited
14 Power Generation Companies Coastal Gujarat Power Limited
15 Power Generation Companies Damodar Valley Corporation
16 Power Generation Companies ETA Power Gen Private Limited
17 Power Generation Companies Gadhia Solar Energy Systems Private Limited
18 Power Generation Companies Ginni Global Pvt. Ltd.
19 Power Generation Companies Greenko Energies Private Limited
20 Power Generation Companies Gujarat Paguthan Energy Corporation Pvt. Ltd.
21 Power Generation Companies Haryana Power Generation Corporation Limited
22 Power Generation Companies Hul Hydro Power Private Limited
23 Power Generation Companies iEnergy Wind Farms (Theni) Private Limited
24 Power Generation Companies Jala Shakti Limited
25 Power Generation Companies Jhajjar Power Limited
26 Power Generation Companies Junagadh Power Projects Private Limited
27 Power Generation Companies Kaveri Gas Power Limited
28 Power Generation Companies Konaseema Gas Power Limited
29 Power Generation Companies Krishna Godavari Power Utilities Limited
30 Power Generation Companies Lanco Anpara Power Limited
31 Power Generation Companies Lanco Budhil Hydro Power Private Limited
32 Power Generation Companies Lanco Kondapalli Power Limited
33 Power Generation Companies Lanco Mandakini Hydro Energy Pvt. Ltd.
34 Power Generation Companies Lanco Power Limited
35 Power Generation Companies Lanco Teesta Hydro Power Private Limited
36 Power Generation Companies Lanco Vidarbha Thermal Power Limited
37 Power Generation Companies Malaxmi Wind Power
38 Power Generation Companies MMS Steel & Power Private Limited
39 Power Generation Companies Nagarjuna Hydro Energy Private Limited
40 Power Generation Companies Narayanpur Power Company Private Limited
41 Power Generation Companies Nava Bharat Ventures Limited.
42 Power Generation Companies Neyveli Lignite Corporation Limited
43 Power Generation Companies NHPC Limited
44 Power Generation Companies NTPC Limited
45 Power Generation Companies NTPC-SAIL Power Company Private Limited
A knowledge sharing endeavour from CRISIL
Insights
77Power Sector Lenders: Will the credit quality trip?
List of Rated Entities in the Power Sector
46 Power Generation Companies Nuclear Power Corporation of India Limited
47 Power Generation Companies P & R Engineering Services Private Limited
48 Power Generation Companies P & R Gogripur Hydro Power Private Limited
49 Power Generation Companies Paschim Hydro Energy Private Limited
50 Power Generation Companies Prasanna Power Limited
51 Power Generation Companies Prathyusha Power Gen Private Limited
52 Power Generation Companies R. R. Energy Limited
53 Power Generation Companies Ravikiran Power Projects (Pvt) Limited
54 Power Generation Companies Reliance Utilities and Power Private Limited
55 Power Generation Companies Rukmani Power and Steel Limited
56 Power Generation Companies Sai Spurthi Power Private Limited
57 Power Generation Companies Sambhav Energy Limited
58 Power Generation Companies Satyamaharshi Power Corporation Limited
59 Power Generation Companies Shiv Renewable Energy Private Limited
60 Power Generation Companies Shravana Power Projects Pvt. Ltd.
61 Power Generation Companies Shree Maheshwar Hydel Power Corporation Ltd.
62 Power Generation Companies Simran Wind Project Private Limited
63 Power Generation Companies Sitapuram Power Limited
64 Power Generation Companies SMS Vidhyut Private Limited
65 Power Generation Companies Sodhi Brothers Hydro Power Private Limited
66 Power Generation Companies Srinivasa Gayithri Resource Recovery Limited
67 Power Generation Companies ST-CMS Electric Company Pvt. Ltd.
68 Power Generation Companies Sterlite Energy Limited
69 Power Generation Companies Sterlite Energy Limited
70 Power Generation Companies Suryachambal Power Limited
71 Power Generation Companies SV Power Private Limited
72 Power Generation Companies Swasti Power Limited
73 Power Generation Companies Talwandi Sabo Power Limited
74 Power Generation Companies Tangling Mini Hydel Power Project
75 Power Generation Companies TCP Limited
76 Power Generation Companies The West Bengal Power Development Corporation Limited
77 Power Generation Companies Torrent Energy Limited
78 Power Generation Companies Trinethra Energy Convertions Limited
79 Power Generation Companies Tungabhadra Power Company Pvt Ltd.
80 Power Generation Companies Udupi Power Corporation Ltd
81 Power Generation Companies Vamshi Hydro Energies Private Limited
82 Power Generation Companies Vamshi Industrial Power Limited
83 Power Generation Companies Vayunandana Power Limited
84 Power Generation Companies Viyyat Power Pvt. Ltd.
85 Power Transmission Companies Delhi Transco Limited
86 Power Transmission Companies East North Interconnection Company Limited
87 Power Transmission Companies Haryana Vidyut Prasaran Nigam Limited
88 Power Transmission Companies Karnataka Power Transmission Corporation Limited
89 Power Transmission Companies Power Grid Corporation of India Limited
90 Power Transmission Companies Powerlinks Transmission Limited
91 Power Transmission Companies Torrent Power Grid Limited
92 Power Transmission Companies Transmission Corporation of Andhra Pradesh Limited
93 Power Distribution Companies Eastern Power Distribution Company of Andhra Pradesh Limited
94 Power Distribution Companies Hubli Electricity Supply Company Ltd
95 Power Distribution Companies Northern Power Distribution Company of Andhra Pradesh Limited
96 Power Distribution Companies Reliance Infrastructure Limited
97 Power Distribution Companies Southern Power Distribution Company of Andhra Pradesh Limited
98 Power Distribution Companies Torrent Power Limited
99 Power Trading Companies National Energy Trading and Services Limited
100 Power Trading Companies NTPC Vidyut Vyapar Nigam Limited
101 Power Trading Companies PTC India Ltd
102 Integrated Power Utilities Gujarat Urja Vikas Nigam Limited
103 Integrated Power Utilities Tamil Nadu Electricity Board
104 Integrated Power Utilities Tamilnadu Generation and Distribution Corporation Limited
105 Integrated Power Utilities The Tata Power Company Limited
106 EPC and Other Services EDAC Engineering Limited
107 EPC and Other Services Flovel Energy Private Limited
108 EPC and Other Services Hythro Power Corporation Limited
109 EPC and Other Services KMG A to Z Systems Private Limited
110 EPC and Other Services Lanco Infratech Limited
111 EPC and Other Services Leena Power-Tech Engineers Private Limited
112 EPC and Other Services Pavani Controls & Panels Limited
113 EPC and Other Services Power Mech Projects Limited
114 EPC and Other Services Siddhartha Engineering Limited
115 EPC and Other Services Sigma Construction
116 EPC and Other Services Tata BP Solar India Limited
117 EPC and Other Services Techno Electric & Engg Co Ltd
118 EPC and Other Services Vasavi Power Services Private Limited
119 EPC and Other Services Venus Controls & Switchgear Pvt. Ltd.
120 Power Equipment Manufacturers ABB Limited
121 Power Equipment Manufacturers Aditya Vidyut Appliances Limited
122 Power Equipment Manufacturers Alfa Transformers Limited
123 Power Equipment Manufacturers Ashok Transformers Pvt Ltd
124 Power Equipment Manufacturers Ashoka Pre-Con Private Limited
125 Power Equipment Manufacturers Atlanta Electricals Private Limited
126 Power Equipment Manufacturers Belliss India Ltd.
127 Power Equipment Manufacturers Bharat Heavy Electricals Limited
128 Power Equipment Manufacturers DF Power Systems Pvt. Limited
129 Power Equipment Manufacturers Diamond Power Infrastructure Limited
130 Power Equipment Manufacturers HPC Electricals Limited
131 Power Equipment Manufacturers Inox Wind Limited
132 Power Equipment Manufacturers Kalpataru Power Transmission Ltd
133 Power Equipment Manufacturers Kamath Transformers Private Limited
134 Power Equipment Manufacturers Kanyaka Parameshwari Engineering Ltd
135 Power Equipment Manufacturers Keshav Electricals Private Limited
136 Power Equipment Manufacturers Kintech Synergy Private Limited
Segment Company Name Segment Company Name
77Power Sector Lenders: Will the credit quality trip?
List of Rated Entities in the Power Sector
46 Power Generation Companies Nuclear Power Corporation of India Limited
47 Power Generation Companies P & R Engineering Services Private Limited
48 Power Generation Companies P & R Gogripur Hydro Power Private Limited
49 Power Generation Companies Paschim Hydro Energy Private Limited
50 Power Generation Companies Prasanna Power Limited
51 Power Generation Companies Prathyusha Power Gen Private Limited
52 Power Generation Companies R. R. Energy Limited
53 Power Generation Companies Ravikiran Power Projects (Pvt) Limited
54 Power Generation Companies Reliance Utilities and Power Private Limited
55 Power Generation Companies Rukmani Power and Steel Limited
56 Power Generation Companies Sai Spurthi Power Private Limited
57 Power Generation Companies Sambhav Energy Limited
58 Power Generation Companies Satyamaharshi Power Corporation Limited
59 Power Generation Companies Shiv Renewable Energy Private Limited
60 Power Generation Companies Shravana Power Projects Pvt. Ltd.
61 Power Generation Companies Shree Maheshwar Hydel Power Corporation Ltd.
62 Power Generation Companies Simran Wind Project Private Limited
63 Power Generation Companies Sitapuram Power Limited
64 Power Generation Companies SMS Vidhyut Private Limited
65 Power Generation Companies Sodhi Brothers Hydro Power Private Limited
66 Power Generation Companies Srinivasa Gayithri Resource Recovery Limited
67 Power Generation Companies ST-CMS Electric Company Pvt. Ltd.
68 Power Generation Companies Sterlite Energy Limited
69 Power Generation Companies Sterlite Energy Limited
70 Power Generation Companies Suryachambal Power Limited
71 Power Generation Companies SV Power Private Limited
72 Power Generation Companies Swasti Power Limited
73 Power Generation Companies Talwandi Sabo Power Limited
74 Power Generation Companies Tangling Mini Hydel Power Project
75 Power Generation Companies TCP Limited
76 Power Generation Companies The West Bengal Power Development Corporation Limited
77 Power Generation Companies Torrent Energy Limited
78 Power Generation Companies Trinethra Energy Convertions Limited
79 Power Generation Companies Tungabhadra Power Company Pvt Ltd.
80 Power Generation Companies Udupi Power Corporation Ltd
81 Power Generation Companies Vamshi Hydro Energies Private Limited
82 Power Generation Companies Vamshi Industrial Power Limited
83 Power Generation Companies Vayunandana Power Limited
84 Power Generation Companies Viyyat Power Pvt. Ltd.
85 Power Transmission Companies Delhi Transco Limited
86 Power Transmission Companies East North Interconnection Company Limited
87 Power Transmission Companies Haryana Vidyut Prasaran Nigam Limited
88 Power Transmission Companies Karnataka Power Transmission Corporation Limited
89 Power Transmission Companies Power Grid Corporation of India Limited
90 Power Transmission Companies Powerlinks Transmission Limited
91 Power Transmission Companies Torrent Power Grid Limited
92 Power Transmission Companies Transmission Corporation of Andhra Pradesh Limited
93 Power Distribution Companies Eastern Power Distribution Company of Andhra Pradesh Limited
94 Power Distribution Companies Hubli Electricity Supply Company Ltd
95 Power Distribution Companies Northern Power Distribution Company of Andhra Pradesh Limited
96 Power Distribution Companies Reliance Infrastructure Limited
97 Power Distribution Companies Southern Power Distribution Company of Andhra Pradesh Limited
98 Power Distribution Companies Torrent Power Limited
99 Power Trading Companies National Energy Trading and Services Limited
100 Power Trading Companies NTPC Vidyut Vyapar Nigam Limited
101 Power Trading Companies PTC India Ltd
102 Integrated Power Utilities Gujarat Urja Vikas Nigam Limited
103 Integrated Power Utilities Tamil Nadu Electricity Board
104 Integrated Power Utilities Tamilnadu Generation and Distribution Corporation Limited
105 Integrated Power Utilities The Tata Power Company Limited
106 EPC and Other Services EDAC Engineering Limited
107 EPC and Other Services Flovel Energy Private Limited
108 EPC and Other Services Hythro Power Corporation Limited
109 EPC and Other Services KMG A to Z Systems Private Limited
110 EPC and Other Services Lanco Infratech Limited
111 EPC and Other Services Leena Power-Tech Engineers Private Limited
112 EPC and Other Services Pavani Controls & Panels Limited
113 EPC and Other Services Power Mech Projects Limited
114 EPC and Other Services Siddhartha Engineering Limited
115 EPC and Other Services Sigma Construction
116 EPC and Other Services Tata BP Solar India Limited
117 EPC and Other Services Techno Electric & Engg Co Ltd
118 EPC and Other Services Vasavi Power Services Private Limited
119 EPC and Other Services Venus Controls & Switchgear Pvt. Ltd.
120 Power Equipment Manufacturers ABB Limited
121 Power Equipment Manufacturers Aditya Vidyut Appliances Limited
122 Power Equipment Manufacturers Alfa Transformers Limited
123 Power Equipment Manufacturers Ashok Transformers Pvt Ltd
124 Power Equipment Manufacturers Ashoka Pre-Con Private Limited
125 Power Equipment Manufacturers Atlanta Electricals Private Limited
126 Power Equipment Manufacturers Belliss India Ltd.
127 Power Equipment Manufacturers Bharat Heavy Electricals Limited
128 Power Equipment Manufacturers DF Power Systems Pvt. Limited
129 Power Equipment Manufacturers Diamond Power Infrastructure Limited
130 Power Equipment Manufacturers HPC Electricals Limited
131 Power Equipment Manufacturers Inox Wind Limited
132 Power Equipment Manufacturers Kalpataru Power Transmission Ltd
133 Power Equipment Manufacturers Kamath Transformers Private Limited
134 Power Equipment Manufacturers Kanyaka Parameshwari Engineering Ltd
135 Power Equipment Manufacturers Keshav Electricals Private Limited
136 Power Equipment Manufacturers Kintech Synergy Private Limited
Segment Company Name Segment Company Name
137 Power Equipment Manufacturers L&T-MHI Turbine Generators Private Limited
138 Power Equipment Manufacturers Mahalaxmi Investment And Trading Pvt Ltd
139 Power Equipment Manufacturers Marson's Electrical Industries
140 Power Equipment Manufacturers Mehru Electrical And Mechanical Engineers Private Limited
141 Power Equipment Manufacturers Modern Transformers Private Limited
142 Power Equipment Manufacturers Nucon Power Controls Pvt. Ltd.
143 Power Equipment Manufacturers Nucon Switchgears Pvt. Ltd.
144 Power Equipment Manufacturers Pan-Electro Technic Enterprises Private Limited
145 Power Equipment Manufacturers Pioneer Wincon (P) Ltd.
146 Power Equipment Manufacturers Powergear Limited
147 Power Equipment Manufacturers Ramkrishna Electricals Limited
148 Power Equipment Manufacturers RTS Power Corporation Ltd.
149 Power Equipment Manufacturers Shreem Electric Limited
150 Power Equipment Manufacturers Shri Ram Switchgears Private Limited
151 Power Equipment Manufacturers Siemens Limited
152 Power Equipment Manufacturers Skipper Electricals (India) Limited
153 Power Equipment Manufacturers Star Delta Transformers Limited
154 Power Equipment Manufacturers Svasca Industries (India) Ltd.
155 Power Equipment Manufacturers Swastik Copper Private Limited
156 Power Equipment Manufacturers Tarapur Transformers Ltd.
157 Power Equipment Manufacturers TD Power Systems Limited
158 Power Equipment Manufacturers Tesla Transformers Ltd.
159 Power Equipment Manufacturers Uttam (Bharat) Electricals Private Limited
160 Power Equipment Manufacturers Venkateswara Electrical Industries Private Limited
161 Power Equipment Manufacturers Victrans Engineers
162 Power Equipment Manufacturers Vijai Electricals Limited
163 Power Equipment Manufacturers Vikas Enterprises
164 Power Cables and Conductors Manufacturers Ajit Solar Private Limited
165 Power Cables and Conductors Manufacturers Cabcon India Pvt Ltd.
166 Power Cables and Conductors Manufacturers Central Cables Limited
167 Power Cables and Conductors Manufacturers Electro Teknica Switchgears Pvt. Ltd.
168 Power Cables and Conductors Manufacturers Elymer Electrics Private Limited
169 Power Cables and Conductors Manufacturers Elymer International Private Limited
170 Power Cables and Conductors Manufacturers Essar Ferro Alloys Company
171 Power Cables and Conductors Manufacturers Finolex Cables Limited
172 Power Cables and Conductors Manufacturers Galaxy Concab (India) Private Limited
173 Power Cables and Conductors Manufacturers Gloster Cables Limited
174 Power Cables and Conductors Manufacturers Gupta Power Infrastructure Limited
175 Power Cables and Conductors Manufacturers Krishna Electrical Industries Ltd.
176 Power Cables and Conductors Manufacturers L&T Special Steels and Heavy Forging Private Limited
177 Power Cables and Conductors Manufacturers Laser Cables Pvt Ltd.
178 Power Cables and Conductors Manufacturers Lotus Powergear Private Limited
179 Power Cables and Conductors Manufacturers Lumino Industries Limited
180 Power Cables and Conductors Manufacturers NECCON POWER & INFRA LIMITED
181 Power Cables and Conductors Manufacturers Oswal Cables Private Limited
182 Power Cables and Conductors Manufacturers Phoenix Transmission Products Private Limited
79Power Sector Lenders: Will the credit quality trip?
List of Rated Entities in the Power Sector
183 Power Cables and Conductors Manufacturers Prem Conductors Private Limited
184 Power Cables and Conductors Manufacturers Ramelex Private Limited
185 Power Cables and Conductors Manufacturers Ravin Cables Limited
186 Power Cables and Conductors Manufacturers Sharavathy Conductors Private Limited
187 Power Cables and Conductors Manufacturers Signet Conductors Pvt Ltd
188 Power Cables and Conductors Manufacturers Simms Engineering Private Limited
189 Power Cables and Conductors Manufacturers Spandana Copper Conductors
190 Power Cables and Conductors Manufacturers Sri Gopikrishna Infrastructure Pvt Ltd
191 Power Cables and Conductors Manufacturers Sterlite Technologies Limited
192 Power Cables and Conductors Manufacturers Yash Ceramics Private Limited
Segment Company Name Segment Company Name
137 Power Equipment Manufacturers L&T-MHI Turbine Generators Private Limited
138 Power Equipment Manufacturers Mahalaxmi Investment And Trading Pvt Ltd
139 Power Equipment Manufacturers Marson's Electrical Industries
140 Power Equipment Manufacturers Mehru Electrical And Mechanical Engineers Private Limited
141 Power Equipment Manufacturers Modern Transformers Private Limited
142 Power Equipment Manufacturers Nucon Power Controls Pvt. Ltd.
143 Power Equipment Manufacturers Nucon Switchgears Pvt. Ltd.
144 Power Equipment Manufacturers Pan-Electro Technic Enterprises Private Limited
145 Power Equipment Manufacturers Pioneer Wincon (P) Ltd.
146 Power Equipment Manufacturers Powergear Limited
147 Power Equipment Manufacturers Ramkrishna Electricals Limited
148 Power Equipment Manufacturers RTS Power Corporation Ltd.
149 Power Equipment Manufacturers Shreem Electric Limited
150 Power Equipment Manufacturers Shri Ram Switchgears Private Limited
151 Power Equipment Manufacturers Siemens Limited
152 Power Equipment Manufacturers Skipper Electricals (India) Limited
153 Power Equipment Manufacturers Star Delta Transformers Limited
154 Power Equipment Manufacturers Svasca Industries (India) Ltd.
155 Power Equipment Manufacturers Swastik Copper Private Limited
156 Power Equipment Manufacturers Tarapur Transformers Ltd.
157 Power Equipment Manufacturers TD Power Systems Limited
158 Power Equipment Manufacturers Tesla Transformers Ltd.
159 Power Equipment Manufacturers Uttam (Bharat) Electricals Private Limited
160 Power Equipment Manufacturers Venkateswara Electrical Industries Private Limited
161 Power Equipment Manufacturers Victrans Engineers
162 Power Equipment Manufacturers Vijai Electricals Limited
163 Power Equipment Manufacturers Vikas Enterprises
164 Power Cables and Conductors Manufacturers Ajit Solar Private Limited
165 Power Cables and Conductors Manufacturers Cabcon India Pvt Ltd.
166 Power Cables and Conductors Manufacturers Central Cables Limited
167 Power Cables and Conductors Manufacturers Electro Teknica Switchgears Pvt. Ltd.
168 Power Cables and Conductors Manufacturers Elymer Electrics Private Limited
169 Power Cables and Conductors Manufacturers Elymer International Private Limited
170 Power Cables and Conductors Manufacturers Essar Ferro Alloys Company
171 Power Cables and Conductors Manufacturers Finolex Cables Limited
172 Power Cables and Conductors Manufacturers Galaxy Concab (India) Private Limited
173 Power Cables and Conductors Manufacturers Gloster Cables Limited
174 Power Cables and Conductors Manufacturers Gupta Power Infrastructure Limited
175 Power Cables and Conductors Manufacturers Krishna Electrical Industries Ltd.
176 Power Cables and Conductors Manufacturers L&T Special Steels and Heavy Forging Private Limited
177 Power Cables and Conductors Manufacturers Laser Cables Pvt Ltd.
178 Power Cables and Conductors Manufacturers Lotus Powergear Private Limited
179 Power Cables and Conductors Manufacturers Lumino Industries Limited
180 Power Cables and Conductors Manufacturers NECCON POWER & INFRA LIMITED
181 Power Cables and Conductors Manufacturers Oswal Cables Private Limited
182 Power Cables and Conductors Manufacturers Phoenix Transmission Products Private Limited
79Power Sector Lenders: Will the credit quality trip?
List of Rated Entities in the Power Sector
183 Power Cables and Conductors Manufacturers Prem Conductors Private Limited
184 Power Cables and Conductors Manufacturers Ramelex Private Limited
185 Power Cables and Conductors Manufacturers Ravin Cables Limited
186 Power Cables and Conductors Manufacturers Sharavathy Conductors Private Limited
187 Power Cables and Conductors Manufacturers Signet Conductors Pvt Ltd
188 Power Cables and Conductors Manufacturers Simms Engineering Private Limited
189 Power Cables and Conductors Manufacturers Spandana Copper Conductors
190 Power Cables and Conductors Manufacturers Sri Gopikrishna Infrastructure Pvt Ltd
191 Power Cables and Conductors Manufacturers Sterlite Technologies Limited
192 Power Cables and Conductors Manufacturers Yash Ceramics Private Limited
Segment Company Name Segment Company Name
Notes
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