After taking haircuts of between 40-60 percent on their loans to troubled steel projects, the banks face a 75 percent loss ratio on their power lending, according to the Bank of America Merrill Lynch estimate.
RANCHI: Deep in the jungles of eastern India lies an abandoned power plant, a warning symbol for the $38 billion of additional bad loans which are about to engulf the country’s 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, after selling the operating company to a specialist in distressed debt. Haircuts of that magnitude are now expected across the whole power sector in India, according to Bank of America Merrill Lynch, suggesting local banks face a new $38 billion wave of losses. That would be 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 problem is especially acute for state-owned banks, which are already reeling under the weight of their problem debts. Out of 21 government-controlled lenders, accounting for more than two thirds of the total loans in India, 19 reported losses in the three months to March 31.
After taking haircuts of between 40-60 percent on their loans to troubled steel projects, the banks face a 75 percent loss ratio on their power lending, according to the Bank of America Merrill Lynch estimate. Many banks are unwilling to accept losses of that magnitude, leading to a tussle between lenders and potential buyers over valuations. Such disputes have delayed a solution for power projects such as those owned by Lanco Infratech Ltd. and Jaiprakash Power Ventures, which together account for some of the biggest stressed loan accounts in India.
“Sales will happen if banks take a more realistic approach on valuations they seek and are willing to take decisive action,” said Hemant Kanoria, chairman of India Power Corp., whose bid for the Jharkhand power plant was rejected by bankers citing different views on the valuation. For some projects, banks are proposing to wait out the problems in the hopes that the situation will improve. At a meeting in Mumbai last month, lenders including State Bank of India, Bank of Baroda and Punjab National Bank suggested the creation of a new company to take over management of about 10 power projects, until demand for the assets picks up.
But recovery hinges more on addressing the fundamental issues that plague the Indian power sector, notably the difficult condition of many of the state-owned distribution firms. “Ultimately the question is whether the distributors will start buying power and paying,” said PK Gupta, managing director at State Bank of India, the nation’s largest lender, which has a so-called watch list of about $1.6 billion of problematic power sector loans.
A recent proposal by the Reserve Bank of India to tighten up further on when lenders have to recognize loan losses elicited protests from Indian power companies, which feared it would force many more into insolvency. The Association of Power Producers wrote to RBI Governor Urjit Patel earlier this year to say the tougher rules would propel projects generating 75 gigawatts of electricity, about a fifth of India’s installed capacity, into bankruptcy. Back at the Jharkand site, there’s little hope that the project will start providing power soon. On a visit last month, the only sign of life was a group of about a dozen private security guards protecting the rusting structure from thieves.
Rs 7,410-crore question: Jharkhand amended energy policy to buy power from Adani at higher price – a government audit said the ‘preferential treatment’ could result in ‘undue benefits’ to the company.
Located on the easternmost tip of Jharkhand near the border of West Bengal, Godda is a district of rolling grasslands and thick forests, punctuated with palm trees and paddy fields, underneath which runs a rich coal seam. The district is home to one of India’s oldest coal mines. But it has one of the lowest electrification rates in the country.
Adani Power Limited, which is part of the Adani Group, is constructing a 1,600 megawatts coal-fired thermal power project here. But the electricity won’t be for local use: it will be supplied across the border to Bangladesh.
Under state policy, Jharkhand is legally entitled to buying 25% of the electricity generated by thermal power projects built within the state. Adani Power Limited has said it will meet this requirement, but from another source, which it has not specified. The power won’t come cheap. Government documents show that Jharkhand has amended its energy policy in 2016 to allow the company to charge a higher price than what other thermal projects bill the state. Older agreements signed with existing thermal power projects allow Jharkhand to buy 12% of the electricity at a price that covers only variable costs – mostly the cost of fuel. The remaining 13% comes at a price that covers both fixed and variable costs – the cost of fuel plus the cost of building and running the project – with the actual tariff determined by the state electricity regulatory commission.
The first stage agreement signed with Adani Power Limited in February 2016 was on similar lines – it said Jharkhand could buy 25% of the electricity based on existing regulations. But the company asked for a change in the terms in the second stage agreement. It wanted the availability of 12% electricity at purely variable costs to be made conditional on the state providing concessional coal for the project. In other words, Jharkhand would have to pay both fixed and variable costs for the entire 25% of the electricity, or supply concessional coal for the Adani project.
Until 2014, many state governments in India, including Jharkhand, enabled thermal power projects within their states to get cheap coal by recommending them to the Centre for the allotment of a captive coal mine – a mine that they could use strictly for their project. But in August 2014, the Supreme Court cancelled such discretionary allotments of coal mines, describing them as arbitrary and non-transparent. In 2015, the Centre amended the law to make auctions mandatory for coal mine allocations.
In its correspondence with Jharkhand government in 2016, Adani Power Limited cited this change in India’s coal mining law as the reason for seeking amendments in the agreement for the Godda project.
Jharkhand’s Bharatiya Janata Party government amended the state’s energy policy on October 6, 2016, in keeping with the changes proposed by the company. The changes were also reflected in the second stage agreement that was prepared the next day itself, and formally signed by both the parties on October 21.
A confidential government audit report calculates that the revised terms could cost the state an additional Rs 296.40 crore every year. Over the course of 25 years – the duration of Adani’s power purchase agreement with Bangladesh – Jharkhand could end up paying the company an additional Rs 7,410 crore.
The office of the state accountant general, which reports to the Comptroller and Auditor General of India, raised queries about the agreement with Jharkhand’s energy department on May 12, 2017. It said the agreement with Adani amounted to “preferential treatment” and would result in “undue benefits” to the company. It pointed out that older thermal power projects were selling electricity to Jharkhand at a lower price based on the earlier formula. The amended energy policy did not retrospectively apply to them, even though they had been stripped of their captive coal mines following the Supreme Court’s 2014 judgement. “It is desirable that there should be consistency and uniformity in the clauses of MoUs between the parties identically situated,” the audit report said.
Jharkhand energy department’s response to the audit enquiry is not in the public domain. Neither the energy department nor the Chief Minister’s Office responded to questions emailed by RailNews. This story will be updated if they respond. Adani Power Limited did not answer specific questions emailed by RailNews. A company spokesperson said since the Godda project “will not have connectivity with Indian Grid, the 25% power to Jharkhand Govt. will be supplied from alternate source but at the tariff of Godda Project; and the said tariff will be determined by State Regulatory Commission.”