Struggling power sector threatens Indian banks

Unstable loans put assets at risk.

India’s public and private sector banks continue to be at risk from the poor financial profiles of state electricity board distribution companies (discoms), a report by Moody’s revealed.

According to the report, almost 70% of total banking system assets are at risk because of their exposure to discoms.

"The poor financial health of discoms in India is one of the key factors weighing on the asset quality of the country's banks. So far, these problems have almost exclusively affected public-sector banks, which represent more than 70% of total banking system assets, and which are directly and indirectly exposed to the credit quality of discoms," notes Srikanth Vadlamani, a Moody's Vice President and Senior Analyst.

Here’s more from Moody’s:

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

For instance, share of discom exposures in impaired loans is as high as 46% at the Oriental Bank of Commerce and 48% at the Central Bank of India.

Moody's report says government measures taken over the last two years have only provided temporary relief to the banks exposed to discom loans.

The measures included the substitution of impaired loans with government obligations and some operational improvements including tariff hikes.

At the same time, Moody's believes that the discoms' key structural problems -- pricing based on non-commercial considerations and inefficient operations -- have not been sufficiently addressed, and a political consensus to allow discoms to price power based on commercial considerations continues to be lacking.