New Delhi: Deep in the jungles of eastern India lies an abandoned power plant, a warning for the $38 billion of additional bad loans about to crash on the country’s stressed assets laden banks.
Like many of India’s power stations, the Jharkhand project had all the markings of success when a group led by State Bank of India lent about $700 million five years ago to build it. There’s abundant coal and water in the area, a rail track was set to run through the premises, and its promise of 1,080 megawatts of electricity was alluring in a country that faces persistent power shortages and blackouts.
Yet today it stands deserted and Indian banks have had to write off three quarters of their loans. Haircuts of that magnitude are now expected across the whole power sector, which is still reeling from the 2014 court-ordered loss of coal mining permits, as well as financing and cash-flow concerns that make revival difficult.
Bank of America Merrill Lynch suggests local banks face a new $38 billion wave of losses, more than four times the $9 billion they’ve written off from a previous tide of bad loans from India’s troubled steel sector.
“It is the largest bad-loan risk in the country,” said Vinayak Bahuguna, chief executive officer of Asset Reconstruction Co. of India Ltd., the firm which bought the Jharkhand plant from its creditors in 2015, about two years after construction stopped. “Just as the banks are beginning to put the stress on steel accounts behind them the power accounts are emerging as the new pain point.” India’s banks, which have some of the highest stressed asset ratios globally, are under mounting pressure from regulators to clean up their books as the government attempts to revive loan growth and boost the economy. That is likely to intensify the reckoning they face from lending to India’s power sector, which is plagued by fuel shortages and difficulties negotiating long term supply contracts with the country’s debt-laden electricity distributors.
The power sector took a turn for the worse in 2014, when the Supreme Court canceled more than 200 coal-mining permits given to companies, calling the free allocations illegal. The sudden decision hurt several power projects, including the Jharkhand plant, and damaged the entire power sector.
The problem is especially acute for state-owned banks that have lent to these projects, given that they are already reeling under the weight of their problem debts.
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