A fairly large chunk of bank loans to the power sector, which hit a new high of R2.92 lakh crore in mid June, could be in jeopardy. According to a report by UBS, 40% of power assets, amounting to just over 3% of total outstanding credit, could end up being restructured or even turn bad by 2012-13.
In fact, given the slowing economy both at home and overseas, loans to other sectors such as textiles, commercial real estate and SMEs could also be in trouble. ?We assume 35% of outstanding restructured loans, or 4% of loans, will relapse by FY13, given weakening macroeconomic conditions,? the report noted, pointing out that loan loss provisions could increase anywhere between 5% and 30% depending on the kind of exposure a bank has to these sectors.
According to Morgan Stanley, a slowing economy could lead to a pickup in the formation of new non-performing loans, especially in rate-sensitive and export-dependent sectors. The brokerage points out that the slowdown would result in slowing top lines for borrowers, even as funding costs have moved up sharply.
Industry watchers point out to a recent instance where Bank of India had to restructure a loan taken by a major power project developer owing to problems over the date of commencing commercial operations.
The worry is that more infrastructure projects may undergo similar restructuring because of various delays. If a loan passes the DCCO by two years, it turns into an NPL, even if it is servicing both interest and principal. Despite concerns about losses of state electricity boards estimated at R68,000 crore for 2010-11, poor fuel linkages and lower-than estimated merchant tariff realisations, banks have continued to lend to power companies. The exposure accounts for 7.8% of the total non-food credit exposure of banks of R37,08,927 crore as on June 17, 2011 up from 4.8% at the end of March 2009. At the end of March 2011, Canara Bank had a total exposure (fund plus non-fund) of around R3,200 crore to the power sector while ICICI Bank had an exposure of R2,200 crore while PNB had an exposure of R2,100 crore, while Axis Bank has loaned around R1,700 crore.
Banks also have a fairly high exposure to the real estate sector at R1.13 lakh crore as of June 17, 2011. While this is a shade lower than the outstanding in April and May, banking industry sources say fresh exposure is being created through Non-Convertible Debentures and other instruments.