Rating agencies to further downgrade more power companies – Adding worry to Power Sector

India’s largest rating agency, Crisil Ltd is set to downgrade more power companies this fiscal year, which will make it tougher for operators of electricity utilities to access bank money for projects and may also increase their borrowing costs significantly. Commercial banks, especially state-run lenders, have already stopped lending to loss-making power companies in the past few months fearing large defaults. The key reasons for the downgrade include stretched receivables, delays in project execution, and debt-funded acquisitions

 

Crisil Ltd, lowered its ratings on 12 power companies in the eight months ended November, compared with 14 companies in the previous fiscal year. Care Ratings downgraded seven firms between April and November, against seven in the whole of last year.

In the same period, Icra Ltd, in which Moody’s Investors Service is the largest shareholder, downgraded at least 23 companies in the power and allied sectors, compared with 19 companies last year. There are clearly concerns on the sector which emanate from the deteriorating financial position of the state distribution utilities and issues in availability of fuel, primarily coal but also natural gas,” said Anjan Ghosh, head of corporate sector ratings, Icra.

Banks lend to power firms at up to 2% above their minimum lending rate for maturities ranging from one to seven years. A low rating restricts the ability of a company to access easy bank money and weakens chances of a good pricing. Typically, bank loans contribute more than 60% of the funds of power companies.

The move by credit assessors assumes grim significance as the finance ministry has cautioned banks against increasing their exposure to power utilities, including distribution companies, unless these firms pare losses and raise tariffs.

India’s power sector is facing a crisis due to multiple reasons including a sharp rise in coal prices, and delays in land acquisition and environmental clearances, leading to delayed project implementation and escalating losses and debts. Besides, tariff revisions and reforms have been absent.

Power sector officials blame the inaction of the Union and State governments on policy reforms for the plight of the sector. “The biggest problem power sector is facing is that of the fuel supply, and problem of fuel supply is because of Coal India Ltd​’s inability to supply coal to power sector. According to Reserve Bank of India data, bank loans outstanding to the power sector stood at Rs. 3.02 trillion on 21 October, compared with Rs. 2.32 trillion a year earlier.

Shares of power companies have seen a tepid response from investors; the power index on BSE Ltd has declined 31% over the past year, ending at 2,021.09 points on 7 December, dropping faster than the Sensex’s 15% fall in that time.