25 Feb 2016 21:24 IST

Sectoral reforms needed to tackle bank NPA problem

Coal availability issues have, for instance, led to power developers not meeting debt commitments

The financial health of public sector banks is a matter of concern to the public at large. The country is looking to the Budget, to learn what measures the Government will take to address the issue of increasing bad loans on the bank’s books. A significant number of stressed assets of the banks have exposure to the sectors of energy, infrastructure, steel and so forth.

Along with the task of taking up bankruptcy law reforms and infusing capital into banks, the Government should focus on issues in other sectors that affect banks, and take steps to address them. Issues in the energy sector have, for instance, led to the predicament of developers not meeting their debt commitments.

India depends largely on coal-based thermal power generation to meet energy needs. The coal-based capacity stands at 1,73,018 MW (of a total power generation capacity of 2,84,303 MW) as of December 2015. Considering an average Station Heat Rate (SHR) and an average Gross Calorific Value of Coal (GCV), we would arrive at a coal requirement of approximately 760 million tonnes of coal per annum, for the plants to operate at an average Plant Load Factor of 80 per cent, that is, the normative requirement of coal.

In India, State-owned enterprises Coal India Limited (CIL) and Singareni Coal Collieries Limited (SCCL) account for over 90 per cent of the coal production. In financial year 2015-16, for the first ten months, coal dispatched by both CIL and SCCL to the power sector was 335.99 million tonnes and 39.63 million tonnes respectively.

Coal requirement

Thus, CIL and SCCL could only meet about 59 per cent of the normative coal requirement of the power plants though, as per the new coal distribution policy, 100 per cent of the plant’s normative coal requirement should be considered for supply.

The power generators can possibly source the unmet coal needs by importing it and purchasing it on e-auction. The e-auction coal constitutes only 10 per cent of the CIL production and would, therefore, scarcely bridge the gap. Imported coal can be consumed by Indian power plants only to a certain extent and is to be blended with domestic coal, owing to the issues concerning the compatibility of the plant with coal of different quality specifications. Therefore, there are limitations to the extent to which imported coal would bridge the gap in the availability of coal.

As a direct consequence of these problems, a significant portion of coal-based thermal power generation capacity remains stranded, for want of input material. This would eventually hamper the ability of the power developers to generate revenues and the meet debt obligations. India should focus on enhancing coal production and limiting the coal-based power generation capacity until the input demand-availability gap is reduced.

However, even in financial year 2015-16, up to December 2015, the country added 9,870 MW of thermal power generation capacity, of which about 6,170 MW pertains to the private sector. Considering an average debt equity ratio of 70:30 across the industry, it becomes evident that, banks have taken an additional exposure at least to the tune of ₹22,500-23,000 crore, in relation to the generation capacity added this year.

Increase production

In this Budget, the Government should focus on taking steps to increase coal production, and reduce the cost of available coal, to sustain the economic viability of power plants and enable developers to meet their debt obligations. Though minuscule, doubling the clean energy cess on coal has increased the burden on the already stressed sector. A maximum of ₹12,000-13,000 crore can be sought to be mobilised as a result of this clean energy cess; this amount can be made as a direct allocation in the Budget, rather that it being imposed on the power generators.

The Government should also evaluate the possibilities of reducing any other direct and indirect taxes applicable to the coal-based thermal sector, considering that, if a coal-based power developer is unable to generate power for non-availability of coal, the developer cannot be held accountable because, in India, majority of the developers invariably depend on statutory authorities for supply of indigenous coal.

The Government can ill afford to tax a sector into which the country has made significant investment in terms of human capital and fund infusion and which even today is the nation’s principal energy source.

Addressing these sector-specific issues is imperative to deal with the problems concerning the increasing NPAs on the books of public sector banks.