Crisil oct11

88
Power Sector Lenders Will the credit quality trip? Will the credit quality trip? October 2011 October 2011 A knowledge sharing endeavour from CRISIL Insights

Transcript of Crisil oct11

Page 1: Crisil oct11

Power Sector LendersWill the credit quality trip?Will the credit quality trip?

October 2011October 2011

A knowledge sharing endeavour from CRISIL

Insights

Page 2: Crisil oct11

Foreword

Power Sector Lenders: Will the credit quality trip?

For over two decades, CRISIL has helped shape the evolution of the debt markets in India, and has added value to market participants in a variety of ways.

‘CRISIL Insights’ is a knowledge sharing endeavour from CRISIL tol Share our analytical insights and thought leadership perspectives

m CRISIL continues to focus on developing a strong understanding of the Indian economy, corporate sector, and financial landscape

m The knowledge and insights gained in this process are constantly shared with issuers and investors on relevant topics that impact the credit markets

l Generate awareness about the rigour followed in our ratings processm As the country’s leading ratings agency, CRISIL has always set standards in analytical

rigour, disclosures, and best practices in the industrym CRISIL tries to generate familiarity of the market participants with the same

l Enhance transparency of our analytical methodology and criteriam To develop confidence of the debt market participants, CRISIL constantly endeavours

to highlight the analytical methodology and criteria used in its ratings process

CRISIL Ratings hopes that you find this research valuable, insightful, and useful. Your comments and queries regarding the issues discussed here are welcome.

Warm Regards,

Ramraj PaiDirector - Ratings

As a part of our knowledge sharing endeavour, I am delighted to present this compendium of articles on India's power sector and power sector lenders.

Given the criticality of the sector and rising risks, there is a keen desire from investors to understand the sector's outlook and its implications for the lenders. The various articles in this compendium highlight insights gained from our analysis of state power utilities (SPUs), distribution entities, generation companies, and lenders to the sector.

In preparing this outlook, we have been constrained by lack of updated and aggregated financial information for SPUs - which distribute nearly 95 per cent of India's power, account for nearly two-thirds of the sector's total debt, and nearly its entire losses - this, in our opinion, significantly adds to the risks for investors. We have gathered information from various industry participants, leveraged our domain understanding (arising from having rated nearly 200 entities in the power industry), and used qualitative estimates, to build and project a landscape for the sector.

After a series of reforms over the past decade, risks in the Indian power sector are again rising - primarily from a weak financial risk profile of state distribution companies (discoms) - CRISIL estimates that the losses of discoms increased to Rs.350-400 billion in 2010-11. These losses can be still higher if the large receivables of SPUs need to be written-off. As a result, the outstanding debt of discoms has risen to Rs.2.1 trillion at the end of March 2011, and can further grow to Rs.3.3 trillion over the next two years.

Further, power generation companies face a structural threat in the form of fuel unavailability and pricing. CRISIL estimates that nearly one-third of capacity under implementation (nearly 20,000 MW) has no- or limited-pass-through of costs, which can impact their viability.

This weakening performance of power sector, unless reversed, can impact the financial system. The total exposure of banks and infrastructure finance companies to the power sector stood at a significant Rs.4.8 trillion, at the end of March 2011, and will grow at a rate of 23 per cent annually till March 2013.

Even though the asset quality of lenders to power sector has remained comfortable so far, it is vulnerable to the heightened risks in the sector. As per a CRISIL study, nearly 45 per cent of the lenders' power sector exposure is to higher-risk SPUs. Despite this vulnerability, the credit risk profiles of specialised power sector lenders are underpinned by two key factors - first, an expectation of policy and funding support from the Government of India (GoI), given their strategic importance; and second, an expectation of visible reforms in the sector.

CRISIL believes that strong policy measures are urgently needed to reform the distribution sector. These include timely availability of dependable financial information, meaningful and regular tariff hikes to enable recovery of economic costs of power supply, and significant reduction in the distribution losses. Further, higher and timely provisions of subsidies by the state governments are critical to reduce their dependence on short-term borrowings.

The government has initiated steps to contain, and gradually improve, the performance of SPUs. These initial measures, however, need to be sustained over a period of time. In absence of any substantive progress over the next 12 to 18 months, the asset quality of power sector lenders will weaken, and they will require additional capital to maintain adequate coverage for the increased delinquencies.

We hope you will find our insights and analysis useful. We welcome your feedback.

A knowledge sharing endeavour from CRISIL

Insights

About CRISIL Insights

Page 3: Crisil oct11

Foreword

Power Sector Lenders: Will the credit quality trip?

For over two decades, CRISIL has helped shape the evolution of the debt markets in India, and has added value to market participants in a variety of ways.

‘CRISIL Insights’ is a knowledge sharing endeavour from CRISIL tol Share our analytical insights and thought leadership perspectives

m CRISIL continues to focus on developing a strong understanding of the Indian economy, corporate sector, and financial landscape

m The knowledge and insights gained in this process are constantly shared with issuers and investors on relevant topics that impact the credit markets

l Generate awareness about the rigour followed in our ratings processm As the country’s leading ratings agency, CRISIL has always set standards in analytical

rigour, disclosures, and best practices in the industrym CRISIL tries to generate familiarity of the market participants with the same

l Enhance transparency of our analytical methodology and criteriam To develop confidence of the debt market participants, CRISIL constantly endeavours

to highlight the analytical methodology and criteria used in its ratings process

CRISIL Ratings hopes that you find this research valuable, insightful, and useful. Your comments and queries regarding the issues discussed here are welcome.

Warm Regards,

Ramraj PaiDirector - Ratings

As a part of our knowledge sharing endeavour, I am delighted to present this compendium of articles on India's power sector and power sector lenders.

Given the criticality of the sector and rising risks, there is a keen desire from investors to understand the sector's outlook and its implications for the lenders. The various articles in this compendium highlight insights gained from our analysis of state power utilities (SPUs), distribution entities, generation companies, and lenders to the sector.

In preparing this outlook, we have been constrained by lack of updated and aggregated financial information for SPUs - which distribute nearly 95 per cent of India's power, account for nearly two-thirds of the sector's total debt, and nearly its entire losses - this, in our opinion, significantly adds to the risks for investors. We have gathered information from various industry participants, leveraged our domain understanding (arising from having rated nearly 200 entities in the power industry), and used qualitative estimates, to build and project a landscape for the sector.

After a series of reforms over the past decade, risks in the Indian power sector are again rising - primarily from a weak financial risk profile of state distribution companies (discoms) - CRISIL estimates that the losses of discoms increased to Rs.350-400 billion in 2010-11. These losses can be still higher if the large receivables of SPUs need to be written-off. As a result, the outstanding debt of discoms has risen to Rs.2.1 trillion at the end of March 2011, and can further grow to Rs.3.3 trillion over the next two years.

Further, power generation companies face a structural threat in the form of fuel unavailability and pricing. CRISIL estimates that nearly one-third of capacity under implementation (nearly 20,000 MW) has no- or limited-pass-through of costs, which can impact their viability.

This weakening performance of power sector, unless reversed, can impact the financial system. The total exposure of banks and infrastructure finance companies to the power sector stood at a significant Rs.4.8 trillion, at the end of March 2011, and will grow at a rate of 23 per cent annually till March 2013.

Even though the asset quality of lenders to power sector has remained comfortable so far, it is vulnerable to the heightened risks in the sector. As per a CRISIL study, nearly 45 per cent of the lenders' power sector exposure is to higher-risk SPUs. Despite this vulnerability, the credit risk profiles of specialised power sector lenders are underpinned by two key factors - first, an expectation of policy and funding support from the Government of India (GoI), given their strategic importance; and second, an expectation of visible reforms in the sector.

CRISIL believes that strong policy measures are urgently needed to reform the distribution sector. These include timely availability of dependable financial information, meaningful and regular tariff hikes to enable recovery of economic costs of power supply, and significant reduction in the distribution losses. Further, higher and timely provisions of subsidies by the state governments are critical to reduce their dependence on short-term borrowings.

The government has initiated steps to contain, and gradually improve, the performance of SPUs. These initial measures, however, need to be sustained over a period of time. In absence of any substantive progress over the next 12 to 18 months, the asset quality of power sector lenders will weaken, and they will require additional capital to maintain adequate coverage for the increased delinquencies.

We hope you will find our insights and analysis useful. We welcome your feedback.

A knowledge sharing endeavour from CRISIL

Insights

About CRISIL Insights

Page 4: Crisil oct11

Analytical contacts

Name Designation Email Id

Pawan Agrawal Director - Corporate & Government Sector Ratings [email protected]

Nagarajan Narasimhan Director - Corporate & Government Sector Ratings [email protected]

Sudip Sural Head - Corporate & Infrastructure Sector Ratings [email protected]

Suman Chowdhury Head - Financial Sector Ratings [email protected]

Anosh Kelawala Senior Manager - Financial Sector Ratings [email protected]

Manish Ballabh Senior Manager - Corporate & Infrastructure Sector Ratings [email protected]

Manoj Damle Senior Manager - Financial Sector Ratings [email protected]

Rohit Chugh Senior Manager - Corporate & Infrastructure Sector Ratings [email protected]

Khyati Shah Manager - Corporate & Infrastructure Sector Ratings [email protected]

Manish Saraf Manager - Financial Sector Ratings [email protected]

Nitesh Jain Manager - Corporate & Infrastructure Sector Ratings [email protected]

Subhasri Narayanan Manager - Financial Sector Ratings [email protected]

Vaibhav Kapoor Manager - Corporate & Infrastructure Sector Ratings [email protected]

Power Sector Lenders: Will the credit quality trip?

Table of Contents

Meaningful action on reforms critical for health of power sector 1

Credit quality of power sector lenders - potential risks ahead 5

Power distribution utilities - current issues and what lies ahead 15

Risks related to fuel and project execution will increase power generation costs 29

FAQs on Power Finance Corporation Limited 37

FAQs on Rural Electrification Corporation Limited 55

List of Rated Entities in the Power Sector 75

Page 5: Crisil oct11

Analytical contacts

Name Designation Email Id

Pawan Agrawal Director - Corporate & Government Sector Ratings [email protected]

Nagarajan Narasimhan Director - Corporate & Government Sector Ratings [email protected]

Sudip Sural Head - Corporate & Infrastructure Sector Ratings [email protected]

Suman Chowdhury Head - Financial Sector Ratings [email protected]

Anosh Kelawala Senior Manager - Financial Sector Ratings [email protected]

Manish Ballabh Senior Manager - Corporate & Infrastructure Sector Ratings [email protected]

Manoj Damle Senior Manager - Financial Sector Ratings [email protected]

Rohit Chugh Senior Manager - Corporate & Infrastructure Sector Ratings [email protected]

Khyati Shah Manager - Corporate & Infrastructure Sector Ratings [email protected]

Manish Saraf Manager - Financial Sector Ratings [email protected]

Nitesh Jain Manager - Corporate & Infrastructure Sector Ratings [email protected]

Subhasri Narayanan Manager - Financial Sector Ratings [email protected]

Vaibhav Kapoor Manager - Corporate & Infrastructure Sector Ratings [email protected]

Power Sector Lenders: Will the credit quality trip?

Table of Contents

Meaningful action on reforms critical for health of power sector 1

Credit quality of power sector lenders - potential risks ahead 5

Power distribution utilities - current issues and what lies ahead 15

Risks related to fuel and project execution will increase power generation costs 29

FAQs on Power Finance Corporation Limited 37

FAQs on Rural Electrification Corporation Limited 55

List of Rated Entities in the Power Sector 75

Page 6: Crisil oct11

1

Meaningful action on reforms critical for health of power sector

The power distribution companies (discoms) in India have, historically, been riddled with

losses and beset by inefficiencies. While most state electricity boards (SEBs) have met the

requirement of trifurcation into generation, transmission and distribution entities, as

mandated by the Indian Electricity Act, 2003, the stated objectives of the reorganisation have

not been fully met. CRISIL believes that the focused efforts initiated by the Government and

key stakeholders have the potential to address the challenges facing the entire power value

chain. While the first meaningful steps have been taken, the sustainability of the reforms

programme will be critical.

CRISIL estimates the net losses (subsidy booked basis) of discoms at around Rs.350 - 400 billion

for 2010-11 (refers to financial year, April 1 to March 31). The widening revenue gap, because

of inadequate and delayed tariff revisions, high aggregate technical and commercial (AT&C)

losses, and sizeable outstanding debt with significant interest costs have led to the mounting

losses of discoms. Profitability pressures appear set to increase further for discoms because of

their susceptibility to volatility in fuel costs, escalating capital costs, and project risks on the

generation front. These factors are likely to translate into an annual increase of 10 to 12 per

cent in average power generation costs over the next two years, which will largely be passed

on to the discoms.

The central power utilities have, thus far, been protected from the discoms' woes because of

the one-time settlement scheme and payment security mechanisms set in place in 2001 by

the Ahluwalia Committee. The discoms' losses have, however, now begun to stretch the

working capital requirements of the generation companies.

The cascading effect of the problems faced by discoms will not be limited to the power sector.

The discoms have continued to borrow from banks, often supported by state guarantees, over

the past two years. Some banks are approaching their exposure limits for the sector, and

already, exhibit increased reluctance to lend further to the sector. CRISIL estimates that large

loss funding has significantly increased discom debt to around Rs.2.1 trillion as on March 31,

2011. Given that a significant portion of the debt has been used to finance losses rather than

create productive assets, the debt only adds to the sector's inefficiencies.

Mounting power purchase costs further weaken discoms' financials

Discom distress can affect entire power value chain, including financiers

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Page 7: Crisil oct11

1

Meaningful action on reforms critical for health of power sector

The power distribution companies (discoms) in India have, historically, been riddled with

losses and beset by inefficiencies. While most state electricity boards (SEBs) have met the

requirement of trifurcation into generation, transmission and distribution entities, as

mandated by the Indian Electricity Act, 2003, the stated objectives of the reorganisation have

not been fully met. CRISIL believes that the focused efforts initiated by the Government and

key stakeholders have the potential to address the challenges facing the entire power value

chain. While the first meaningful steps have been taken, the sustainability of the reforms

programme will be critical.

CRISIL estimates the net losses (subsidy booked basis) of discoms at around Rs.350 - 400 billion

for 2010-11 (refers to financial year, April 1 to March 31). The widening revenue gap, because

of inadequate and delayed tariff revisions, high aggregate technical and commercial (AT&C)

losses, and sizeable outstanding debt with significant interest costs have led to the mounting

losses of discoms. Profitability pressures appear set to increase further for discoms because of

their susceptibility to volatility in fuel costs, escalating capital costs, and project risks on the

generation front. These factors are likely to translate into an annual increase of 10 to 12 per

cent in average power generation costs over the next two years, which will largely be passed

on to the discoms.

The central power utilities have, thus far, been protected from the discoms' woes because of

the one-time settlement scheme and payment security mechanisms set in place in 2001 by

the Ahluwalia Committee. The discoms' losses have, however, now begun to stretch the

working capital requirements of the generation companies.

The cascading effect of the problems faced by discoms will not be limited to the power sector.

The discoms have continued to borrow from banks, often supported by state guarantees, over

the past two years. Some banks are approaching their exposure limits for the sector, and

already, exhibit increased reluctance to lend further to the sector. CRISIL estimates that large

loss funding has significantly increased discom debt to around Rs.2.1 trillion as on March 31,

2011. Given that a significant portion of the debt has been used to finance losses rather than

create productive assets, the debt only adds to the sector's inefficiencies.

Mounting power purchase costs further weaken discoms' financials

Discom distress can affect entire power value chain, including financiers

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Page 8: Crisil oct11

3

Focused efforts by Government and financiers to address the challengesThe following concerted measures are geared towards addressing the challenges faced by the

sector:l Commitment of State Governments: Following the formation of the Shunglu Committee

on State Power Utilities, the state power ministers adopted a 12-point resolution in July

2011, addressing the key problems faced by discoms and the commitment of monetary

and administrative support by state governments to resolve the challenges plaguing the

discom sector. Timely tariff filing with the objective of bridging revenue gaps and

automatic pass through of fuel cost increases were some of the key points adopted in the

resolution. The state governments have also adopted a resolution to shore up the balance

sheets of discoms by converting state government loans to equity and clearing up subsidy

dues. l Lender's efforts: At the same time, in an attempt to discipline the fiscal management of

discoms, banks and power financiers have come together and begun linking disbursal of

funds to improvement in discoms' performance. This is to ensure that weak discoms do

not take advantage of competition amongst lenders. l Performance-linked credit mechanism: The Ministry of Power (MoP) is also

contemplating merit-linked credit disbursal to discoms based on their operating

performance and credit rating.l AT&C loss reduction: The MoP launched Government of India-funded Restructured

Accelerated Power Development and Reforms Programme (R-APDRP) in July 2008 aimed

at bringing down the AT&C losses in the sector. With a corpus of Rs.100 billion for Part-A

projects and Rs.400 billion for Part-B projects, the R-APDRP scheme can go a long way in

reducing the AT&C losses. The cumulative sanctions and disbursements under this

scheme since inception have been Rs.220 billion and Rs.40 billion, respectively.

The government's efforts have spurred initial action on the ground. At least five states have

announced tariff hikes for 2011-12 over the past two to three months. While these tariff hikes

fall short of the required increase to bridge the losses, some discoms have announced hikes

after long gaps. These are encouraging signs and CRISIL believes that despite political

compulsions, such hikes will have to continue over the medium term in order to bridge the

large revenue gap. However, it is the seriousness and urgency with which further steps

(particularly pertaining to progress on AT&C loss reduction and timely receipt of state

government subsidy) are implemented, that will have a crucial bearing on the health of the

sector.

Road ahead

CRISIL believes that some of the initial steps will be sustained over the medium term, and that

further build-up of stress will be arrested and the annual losses contained. CRISIL projects

that the discom sector's net losses (subsidy booked basis) will be contained at broadly the

same levels for 2011-12 and 2012-13. However, the debt will increase to Rs.3.3 trillion as on

March 31, 2013, from Rs.2.1 trillion as on March 31, 2011. CRISIL's base case assumptions for

2011-12 and 2012-13 are as follows:

l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes, and the

curtailed lending by banksl Reduction of AT&C losses taking benefit of the R-APDRP schemel State government subsidy to increase, given the fact that funding from banks and

financial institutions will not be available for weaker discoms, compelling state

governments to bridge the gap

CRISIL believes that concrete action according to the plan laid out by the main stakeholders--

the Government of India, state governments, and the lenders--will be key to addressing the

challenges facing the discom sector. If progress on this front is delayed, the adverse impact on

the power value chain as well as power financiers would begin to manifest itself over the next

12 to 18 months.

CRISIL's opinion piece, 'Power Distribution Utilities current issues and what lies ahead' details

the challenges that the discoms continue to face. The commentary, 'Risks related to fuel and

project execution will increase power generation costs', addresses emerging challenges for

the generation sector, and their fallout on discoms.

Meaningful action on reforms critical for health of power sector

Power Sector Lenders: Will the credit quality trip?

Page 9: Crisil oct11

3

Focused efforts by Government and financiers to address the challengesThe following concerted measures are geared towards addressing the challenges faced by the

sector:l Commitment of State Governments: Following the formation of the Shunglu Committee

on State Power Utilities, the state power ministers adopted a 12-point resolution in July

2011, addressing the key problems faced by discoms and the commitment of monetary

and administrative support by state governments to resolve the challenges plaguing the

discom sector. Timely tariff filing with the objective of bridging revenue gaps and

automatic pass through of fuel cost increases were some of the key points adopted in the

resolution. The state governments have also adopted a resolution to shore up the balance

sheets of discoms by converting state government loans to equity and clearing up subsidy

dues. l Lender's efforts: At the same time, in an attempt to discipline the fiscal management of

discoms, banks and power financiers have come together and begun linking disbursal of

funds to improvement in discoms' performance. This is to ensure that weak discoms do

not take advantage of competition amongst lenders. l Performance-linked credit mechanism: The Ministry of Power (MoP) is also

contemplating merit-linked credit disbursal to discoms based on their operating

performance and credit rating.l AT&C loss reduction: The MoP launched Government of India-funded Restructured

Accelerated Power Development and Reforms Programme (R-APDRP) in July 2008 aimed

at bringing down the AT&C losses in the sector. With a corpus of Rs.100 billion for Part-A

projects and Rs.400 billion for Part-B projects, the R-APDRP scheme can go a long way in

reducing the AT&C losses. The cumulative sanctions and disbursements under this

scheme since inception have been Rs.220 billion and Rs.40 billion, respectively.

The government's efforts have spurred initial action on the ground. At least five states have

announced tariff hikes for 2011-12 over the past two to three months. While these tariff hikes

fall short of the required increase to bridge the losses, some discoms have announced hikes

after long gaps. These are encouraging signs and CRISIL believes that despite political

compulsions, such hikes will have to continue over the medium term in order to bridge the

large revenue gap. However, it is the seriousness and urgency with which further steps

(particularly pertaining to progress on AT&C loss reduction and timely receipt of state

government subsidy) are implemented, that will have a crucial bearing on the health of the

sector.

Road ahead

CRISIL believes that some of the initial steps will be sustained over the medium term, and that

further build-up of stress will be arrested and the annual losses contained. CRISIL projects

that the discom sector's net losses (subsidy booked basis) will be contained at broadly the

same levels for 2011-12 and 2012-13. However, the debt will increase to Rs.3.3 trillion as on

March 31, 2013, from Rs.2.1 trillion as on March 31, 2011. CRISIL's base case assumptions for

2011-12 and 2012-13 are as follows:

l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes, and the

curtailed lending by banksl Reduction of AT&C losses taking benefit of the R-APDRP schemel State government subsidy to increase, given the fact that funding from banks and

financial institutions will not be available for weaker discoms, compelling state

governments to bridge the gap

CRISIL believes that concrete action according to the plan laid out by the main stakeholders--

the Government of India, state governments, and the lenders--will be key to addressing the

challenges facing the discom sector. If progress on this front is delayed, the adverse impact on

the power value chain as well as power financiers would begin to manifest itself over the next

12 to 18 months.

CRISIL's opinion piece, 'Power Distribution Utilities current issues and what lies ahead' details

the challenges that the discoms continue to face. The commentary, 'Risks related to fuel and

project execution will increase power generation costs', addresses emerging challenges for

the generation sector, and their fallout on discoms.

Meaningful action on reforms critical for health of power sector

Power Sector Lenders: Will the credit quality trip?

Page 10: Crisil oct11

5

Credit quality of power sector lenders - potential risks ahead

Executive Summary

Overview of borrowings by the power sector

Given the funding needs of upcoming private sector power projects and state power utilities

(SPUs), CRISIL believes that the exposure of lenders to the power sector will continue to

increase over the medium term. While the incremental exposure of banks will remain

primarily to private generation projects, specialised lenders such as Power Finance

Corporation Ltd (PFC) and Rural Electrification Corporation Ltd (REC) will continue to be the

key financiers to the SPUs.

Despite challenges in lending to the power sector, lenders have maintained healthy asset

quality thus far, with negligible reported gross non-performing assets (NPAs). The banks'

diversified loan portfolios and comfortable capitalisation, partly offsets the impact of NPAs.

The credit risk profiles of the specialised power sector lenders is supported by their strategic

importance to the Government of India, their comfortable capitalisation and earnings, and

their asset protection mechanisms (refer to CRISIL article, 'Frequently asked questions [FAQs]

on PFC and REC,' for further details).

Systemic risks in lending to the power sector have increased significantly in the recent past,

primarily because of increasing losses and the substantial debt of the SPUs, particularly,

distribution companies. CRISIL believes that attempts to reform the distribution sector is

likely to lead to improved efficiency and reduced transmission and distribution losses, and

arrest the build up of stress in the distribution sector. If, on the other hand, status quo

continues, asset-side risks will increase for power sector lenders, especially for specialised

lenders such as PFC and REC. The pace and degree of reforms in the sector, therefore, will be a

key monitorable over the next 12 to 18 months.

The borrowings of the power sector - the SPUs, central power utilities (CPUs), and private

sector power utilities - are estimated at around Rs.6.5 trillion as on March 31, 2011. Of this,

lenders - banks, infrastructure financing non-banking finance companies (NBFC-IFCs), such as

PFC and REC, and other IFCs, and India Infrastructure Finance Company Ltd (IIFCL), extended

around 75 per cent of the power sector's borrowings (see Chart 1). The remaining 25 per cent

of the sector's borrowings is from sources such as bonds, the central and state government

loans, and foreign currency borrowings.

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Page 11: Crisil oct11

5

Credit quality of power sector lenders - potential risks ahead

Executive Summary

Overview of borrowings by the power sector

Given the funding needs of upcoming private sector power projects and state power utilities

(SPUs), CRISIL believes that the exposure of lenders to the power sector will continue to

increase over the medium term. While the incremental exposure of banks will remain

primarily to private generation projects, specialised lenders such as Power Finance

Corporation Ltd (PFC) and Rural Electrification Corporation Ltd (REC) will continue to be the

key financiers to the SPUs.

Despite challenges in lending to the power sector, lenders have maintained healthy asset

quality thus far, with negligible reported gross non-performing assets (NPAs). The banks'

diversified loan portfolios and comfortable capitalisation, partly offsets the impact of NPAs.

The credit risk profiles of the specialised power sector lenders is supported by their strategic

importance to the Government of India, their comfortable capitalisation and earnings, and

their asset protection mechanisms (refer to CRISIL article, 'Frequently asked questions [FAQs]

on PFC and REC,' for further details).

Systemic risks in lending to the power sector have increased significantly in the recent past,

primarily because of increasing losses and the substantial debt of the SPUs, particularly,

distribution companies. CRISIL believes that attempts to reform the distribution sector is

likely to lead to improved efficiency and reduced transmission and distribution losses, and

arrest the build up of stress in the distribution sector. If, on the other hand, status quo

continues, asset-side risks will increase for power sector lenders, especially for specialised

lenders such as PFC and REC. The pace and degree of reforms in the sector, therefore, will be a

key monitorable over the next 12 to 18 months.

The borrowings of the power sector - the SPUs, central power utilities (CPUs), and private

sector power utilities - are estimated at around Rs.6.5 trillion as on March 31, 2011. Of this,

lenders - banks, infrastructure financing non-banking finance companies (NBFC-IFCs), such as

PFC and REC, and other IFCs, and India Infrastructure Finance Company Ltd (IIFCL), extended

around 75 per cent of the power sector's borrowings (see Chart 1). The remaining 25 per cent

of the sector's borrowings is from sources such as bonds, the central and state government

loans, and foreign currency borrowings.

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Page 12: Crisil oct11

7

This article focuses on these key lenders' exposure to the power sector, and assesses their

asset quality.

CRISIL believes that the lenders' power sector advances will continue to increase steadily over

the medium term. The lenders' power sector advances have grown at a compound annual

growth rate (CAGR) of about 31 per cent to Rs.4.8 trillion as on March 31, 2011 from Rs.1.3

trillion as on March 31, 2006.

CRISIL estimates that advances to the sector will grow further, at a CAGR of 23 per cent over

the next two years to about Rs.7.3 trillion as on March 31, 2013 (see Chart 2). The growth will

be driven primarily by the strong pipeline of undisbursed sanctions to the power sector.

Nevertheless, growth in power sector advances may moderate, given the lenders' increasing

caution in disbursing to the sector, especially to the SPUs. The banks, in particular, have

slowed down fresh sanctions to new power sector projects. The sector will also look to the

lenders to fund its ongoing investments in transmission and distribution, increasing working

capital requirements due to increased losses of distribution companies, and projects under

implementation.

Lenders' power sector exposures to increase further

Banks to remain major lenders

The share of power sector advances in the banking industry's total advances has almost

doubled to 7.3 per cent as on March 31, 2011 from 3.7 per cent as on March 31, 2008. CRISIL

estimates the banks' outstanding undisbursed sanctions as exceeding Rs.1.3 trillion as on

March 31, 2011. Disbursements from existing sanctions and conversion of non-fund exposures

to fund-based exposures may increase the share of power sector advances to about 7.8 per

cent of banks' total advances by March 31, 2013 (see Chart 3).

Chart 2: Growth trend in power sector advances

0

1

2

3

4

5

6

7

8

2006 2007 2008 2009 2010 2011 2013 (P)

As on March 31,

5 year CAGR of 31%

Chart 3: Growth in banking industry's power sector advances

4.0% 3.7% 3.8%4.8%

6.2%

7.3%7.8%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2006 2007 2008 2009 2010 2011 2013 (P)

As of March

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Power sector Advances Undisbursed sanctions Share in total advances

Undisbursed Sanctions

Rs.

Tri

llio

nR

s. T

rilli

on

Credit quality of power sector lenders - potential risks ahead

Power Sector Lenders: Will the credit quality trip?

Banks42%

Others25%

Other IFCs5%

PFC + REC28%

Chart 1: Source of borrowings by power sector as on March 31, 2011

Page 13: Crisil oct11

7

This article focuses on these key lenders' exposure to the power sector, and assesses their

asset quality.

CRISIL believes that the lenders' power sector advances will continue to increase steadily over

the medium term. The lenders' power sector advances have grown at a compound annual

growth rate (CAGR) of about 31 per cent to Rs.4.8 trillion as on March 31, 2011 from Rs.1.3

trillion as on March 31, 2006.

CRISIL estimates that advances to the sector will grow further, at a CAGR of 23 per cent over

the next two years to about Rs.7.3 trillion as on March 31, 2013 (see Chart 2). The growth will

be driven primarily by the strong pipeline of undisbursed sanctions to the power sector.

Nevertheless, growth in power sector advances may moderate, given the lenders' increasing

caution in disbursing to the sector, especially to the SPUs. The banks, in particular, have

slowed down fresh sanctions to new power sector projects. The sector will also look to the

lenders to fund its ongoing investments in transmission and distribution, increasing working

capital requirements due to increased losses of distribution companies, and projects under

implementation.

Lenders' power sector exposures to increase further

Banks to remain major lenders

The share of power sector advances in the banking industry's total advances has almost

doubled to 7.3 per cent as on March 31, 2011 from 3.7 per cent as on March 31, 2008. CRISIL

estimates the banks' outstanding undisbursed sanctions as exceeding Rs.1.3 trillion as on

March 31, 2011. Disbursements from existing sanctions and conversion of non-fund exposures

to fund-based exposures may increase the share of power sector advances to about 7.8 per

cent of banks' total advances by March 31, 2013 (see Chart 3).

Chart 2: Growth trend in power sector advances

0

1

2

3

4

5

6

7

8

2006 2007 2008 2009 2010 2011 2013 (P)

As on March 31,

5 year CAGR of 31%

Chart 3: Growth in banking industry's power sector advances

4.0% 3.7% 3.8%4.8%

6.2%

7.3%7.8%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2006 2007 2008 2009 2010 2011 2013 (P)

As of March

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Power sector Advances Undisbursed sanctions Share in total advances

Undisbursed Sanctions

Rs.

Tri

llio

nR

s. T

rilli

on

Credit quality of power sector lenders - potential risks ahead

Power Sector Lenders: Will the credit quality trip?

Banks42%

Others25%

Other IFCs5%

PFC + REC28%

Chart 1: Source of borrowings by power sector as on March 31, 2011

Page 14: Crisil oct11

9

Strong growth in the banks' power sector advances has resulted in a gradual increase in their

market share over the past few years; banks have a market share of about 56 per cent as on

March 31, 2011, and are expected to maintain market share over the medium term because

of the pipeline of undisbursed sanctions.

Currently, the shares of SPUs, CPUs, and private sector in the banking industry's power sector

advances are estimated at 63, 17, and 20 per cent, respectively. The share of the private sector

is low, because the numerous private sector generation projects are still in the

implementation stage and the borrowers also have access to alternate funding arrangements

such as foreign currency borrowings and buyers' credit. As project implementation gathers

pace, projects may draw on the undisbursed sanctions, and substitute non-fund-based

exposures with fund-based ones. Banks are expected to meet about three-fourths of the

private sector's incremental funding requirements. The share of funding to the private sector

is, therefore, expected to increase to about 30 per cent over the next 2 years.

Among infrastructure-financing companies, PFC and REC are key lenders to the power sector,

especially the SPUs. Their combined advances have grown at a CAGR of 24.4 per cent over the

Exposure to private sector projects to drive banks' power sector advances growth

PFC and REC to remain key lenders to SPUs

Chart 4: Trend in market share of power sector lenders

47%56% 56%

48%38% 38%

0%

20%

40%

60%

80%

100%

2006 2011 2013 (P)

As of March

Banks PFC and REC Other IFCs

past 5 years to Rs.1.8 trillion as on March 31, 2011. Their share in lending to the SPUs has,

however, reduced in recent years on account of intensifying competition from banks.

Nevertheless, CRISIL believes that PFC and REC may remain the key lenders to the SPUs, and

meet nearly half of the SPUs' incremental funding requirements by March 2013.

The gross NPAs of power sector lenders are currently negligible; the banks' gross NPAs in

power sector advances remain at less than 0.2 per cent as on March 31, 2011. PFC and REC's

gross NPAs are at 0.2 per cent and 0.3 per cent, respectively, as on June 30, 2011.

However, the lenders' asset quality remains exposed to increased systemic risks in the power

sector, especially in SPU exposures (refer to CRISIL article, 'Meaningful action on reforms

critical for health of power sector’ for details). SPUs account for nearly two-thirds of the

power sector exposure of lenders as on March 31, 2011 (see Chart 5). CRISIL has, therefore,

analysed the impact of this exposure on the lenders' asset quality.

Increasing systemic risks: A cause for worry?

Chart 5: Sector wise composition of power sector advances as on March 31, 2011

Central

15%

State

63%

Private

22%

5% 6% 6%

Credit quality of power sector lenders - potential risks ahead

Power Sector Lenders: Will the credit quality trip?

Page 15: Crisil oct11

9

Strong growth in the banks' power sector advances has resulted in a gradual increase in their

market share over the past few years; banks have a market share of about 56 per cent as on

March 31, 2011, and are expected to maintain market share over the medium term because

of the pipeline of undisbursed sanctions.

Currently, the shares of SPUs, CPUs, and private sector in the banking industry's power sector

advances are estimated at 63, 17, and 20 per cent, respectively. The share of the private sector

is low, because the numerous private sector generation projects are still in the

implementation stage and the borrowers also have access to alternate funding arrangements

such as foreign currency borrowings and buyers' credit. As project implementation gathers

pace, projects may draw on the undisbursed sanctions, and substitute non-fund-based

exposures with fund-based ones. Banks are expected to meet about three-fourths of the

private sector's incremental funding requirements. The share of funding to the private sector

is, therefore, expected to increase to about 30 per cent over the next 2 years.

Among infrastructure-financing companies, PFC and REC are key lenders to the power sector,

especially the SPUs. Their combined advances have grown at a CAGR of 24.4 per cent over the

Exposure to private sector projects to drive banks' power sector advances growth

PFC and REC to remain key lenders to SPUs

Chart 4: Trend in market share of power sector lenders

47%56% 56%

48%38% 38%

0%

20%

40%

60%

80%

100%

2006 2011 2013 (P)

As of March

Banks PFC and REC Other IFCs

past 5 years to Rs.1.8 trillion as on March 31, 2011. Their share in lending to the SPUs has,

however, reduced in recent years on account of intensifying competition from banks.

Nevertheless, CRISIL believes that PFC and REC may remain the key lenders to the SPUs, and

meet nearly half of the SPUs' incremental funding requirements by March 2013.

The gross NPAs of power sector lenders are currently negligible; the banks' gross NPAs in

power sector advances remain at less than 0.2 per cent as on March 31, 2011. PFC and REC's

gross NPAs are at 0.2 per cent and 0.3 per cent, respectively, as on June 30, 2011.

However, the lenders' asset quality remains exposed to increased systemic risks in the power

sector, especially in SPU exposures (refer to CRISIL article, 'Meaningful action on reforms

critical for health of power sector’ for details). SPUs account for nearly two-thirds of the

power sector exposure of lenders as on March 31, 2011 (see Chart 5). CRISIL has, therefore,

analysed the impact of this exposure on the lenders' asset quality.

Increasing systemic risks: A cause for worry?

Chart 5: Sector wise composition of power sector advances as on March 31, 2011

Central

15%

State

63%

Private

22%

5% 6% 6%

Credit quality of power sector lenders - potential risks ahead

Power Sector Lenders: Will the credit quality trip?

Page 16: Crisil oct11

11

Approach to categorising risks in power sector exposures

SPU exposuresMost SPUs have weak financial risk profiles, because of mounting losses and large debt, and

delays in receipt of subsidies from the state governments. CRISIL has undertaken a detailed

analysis, and prepared a risk matrix (see Chart 6) to ascertain the impact of SPU exposures on

lenders' asset quality.

l Given that SPUs continue to operate as an arm of, and depend on, the state governments,

for support, a two-dimensional heat map has been prepared to juxtapose the lenders'

SPU exposure against the risk clustering of state finances to arrive at the eventual risks in

the portfolio.

l The X-axis represents the risk profile of SPUs. Exposure to SPUs has been classified into

low, moderate or high risk, based on a combination of three factors: the gap between the

distribution companies' average revenue receipts (ARRs) and average cost of supply

(ACS), their aggregate technical and commercial (AT&C) losses, and outstanding debt. The

risk profiling of distribution companies is used as proxy for SPUs as a whole, given the

strong linkages among generation, transmission and distribution companies.

l The Y-axis represents the state governments' ability to support the SPUs. Based on the

health of state finances, states have been classified into four - with Cluster I denoting

highest ability, and Cluster IV, lowest ability. Clustering of the states' financial risk profiles

is based on analyses of state finances on three key parameters - fiscal management, self-

reliance, and debt-servicing ability.

The lenders' SPU exposures have, thus, been categorised into four risk categories - from low

risk to highest risk - as indicated in Table 1:

Table 1: Risk categorisation of SPU exposures

Per Cent Rs. Trillion

Highest Risk 40 1.2

High Risk 30 0.9

Moderate 20 0.6

Low 10 0.3

Total SPU exposure 100 3.0

Table 1 indicates that the lenders' exposure to the high- and highest- risk categories of SPUs is

around 70 per cent.

Additionally, private sector projects are increasingly facing challenges because of

uncertainties regarding regulatory clearances, availability of fuel, and ability to pass on rising

fuel costs (refer to CRISIL article, 'Risks related to fuel and project execution will increase

power generation costs' for details). CRISIL has, therefore, also assessed the extent of risks in

private sector projects.

Private sector exposures

Credit quality of power sector lenders - potential risks ahead

Power Sector Lenders: Will the credit quality trip?

Cluster IV(Lowest)

Himachal PradeshWest Bengal

BiharJammu & KashmirNorth Eastern States (excluding Assam)

Cluster IIIKerala

Uttarakhand

JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh

AssamOrissa

Cluster IIGoa

GujaratChhattisgarhMaharashtra

Andhra PradeshHaryanaTamil Nadu

Cluster I (Highest)

Delhi Karnataka

Low Risk Moderate Risk High Risk

Risk profile of State Power Utilities

Stat

e G

ove

rnm

ent

abili

ty t

o s

up

po

rt

Chart 6: Risk matrix of SPU exposures

Highest Risk Moderate RiskHigh Risk Low Risk

Page 17: Crisil oct11

11

Approach to categorising risks in power sector exposures

SPU exposuresMost SPUs have weak financial risk profiles, because of mounting losses and large debt, and

delays in receipt of subsidies from the state governments. CRISIL has undertaken a detailed

analysis, and prepared a risk matrix (see Chart 6) to ascertain the impact of SPU exposures on

lenders' asset quality.

l Given that SPUs continue to operate as an arm of, and depend on, the state governments,

for support, a two-dimensional heat map has been prepared to juxtapose the lenders'

SPU exposure against the risk clustering of state finances to arrive at the eventual risks in

the portfolio.

l The X-axis represents the risk profile of SPUs. Exposure to SPUs has been classified into

low, moderate or high risk, based on a combination of three factors: the gap between the

distribution companies' average revenue receipts (ARRs) and average cost of supply

(ACS), their aggregate technical and commercial (AT&C) losses, and outstanding debt. The

risk profiling of distribution companies is used as proxy for SPUs as a whole, given the

strong linkages among generation, transmission and distribution companies.

l The Y-axis represents the state governments' ability to support the SPUs. Based on the

health of state finances, states have been classified into four - with Cluster I denoting

highest ability, and Cluster IV, lowest ability. Clustering of the states' financial risk profiles

is based on analyses of state finances on three key parameters - fiscal management, self-

reliance, and debt-servicing ability.

The lenders' SPU exposures have, thus, been categorised into four risk categories - from low

risk to highest risk - as indicated in Table 1:

Table 1: Risk categorisation of SPU exposures

Per Cent Rs. Trillion

Highest Risk 40 1.2

High Risk 30 0.9

Moderate 20 0.6

Low 10 0.3

Total SPU exposure 100 3.0

Table 1 indicates that the lenders' exposure to the high- and highest- risk categories of SPUs is

around 70 per cent.

Additionally, private sector projects are increasingly facing challenges because of

uncertainties regarding regulatory clearances, availability of fuel, and ability to pass on rising

fuel costs (refer to CRISIL article, 'Risks related to fuel and project execution will increase

power generation costs' for details). CRISIL has, therefore, also assessed the extent of risks in

private sector projects.

Private sector exposures

Credit quality of power sector lenders - potential risks ahead

Power Sector Lenders: Will the credit quality trip?

Cluster IV(Lowest)

Himachal PradeshWest Bengal

BiharJammu & KashmirNorth Eastern States (excluding Assam)

Cluster IIIKerala

Uttarakhand

JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh

AssamOrissa

Cluster IIGoa

GujaratChhattisgarhMaharashtra

Andhra PradeshHaryanaTamil Nadu

Cluster I (Highest)

Delhi Karnataka

Low Risk Moderate Risk High Risk

Risk profile of State Power Utilities

Stat

e G

ove

rnm

ent

abili

ty t

o s

up

po

rt

Chart 6: Risk matrix of SPU exposures

Highest Risk Moderate RiskHigh Risk Low Risk

Page 18: Crisil oct11

13

Calculating exposure at risk

Base case scenario:

Stress case scenario:

Clearly, lenders will be susceptible to increased asset quality pressures over the medium term.

However, the central and state governments are undertaking reform measures, especially to

help the SPUs pass on rising costs and reduce losses. CRISIL estimates the exposure in the

lenders' (banks and NBFC-IFCs, combined) power sector portfolio as on March 31, 2011, as

susceptible to the risk of slippages to NPAs by end-March 2013, as follows (see Table 2):l Implementation of reform measures as expected by CRISIL over the

next 12 to 18 months (refer to article, 'Power distribution utilities - current issues and

what lies ahead’ for details).l No major reforms are implemented, resulting in further weakening

in the SPUs' performance

Table 2: Lenders' exposure at risk

* refer to Annexure I for the key assumptions

As Table 2 indicates, lenders to the power sector will be able to cope with increased asset

quality challenges under the base-case scenario. Their capital coverage for exposure at risk

will remain adequate at around 7.4 times.

Under the stress-case scenario, however, asset quality will be adversely impacted, with net

worth coverage for exposure at risk declining to about 4.9 times. The impact will, however,

vary from lender to lender. Banks with their diversified loan portfolio will be in a better

position to manage the impact, while specialised lenders such as PFC and REC will be more

vulnerable, given their high sectoral concentration and large exposure to weak SPUs. Under

the stress-case scenario, the specialised lenders' net worth coverage for exposure at risk is

likely to be between 1 and 2 times, and will require capital infusions to maintain adequate

coverage for increased NPAs. Hence, timeliness in the implementation of reforms will remain a

key rating monitorable for lenders to the power sector over the next 12 to 18 months.

Base Case Stress Case

Exposure at Risk *

Highest Risk (SPUs) Rs. Bn. 121 363

High Risk (SPUs) Rs. Bn. 45 91

Private Sector Rs. Bn. 53 105

Total Exposure at Risk Rs. Bn. 219 559

Total Power Sector Advances Rs. Bn. 4828 4828

Exposure at Risk Per Cent 4.5 11.6

Net Worth / Exposure At Risk Times 7.4 4.9

Annexure I

Assumptions in calculating lenders' exposure at risk

CRISIL has factored in the following percentages of lenders' SPU and private sector exposures

to be at risk:

For SPUs

Proportion of exposure at risk under

Highest risk category 10 30

High risk category 5 10

Private sector projects 5 10

Base Case Stress Case

In the case of banks, net worth / exposure at risk calculation factors in their power sector

exposure at risk and NPAs from other sectors.

In per cent

Credit quality of power sector lenders - potential risks ahead

Power Sector Lenders: Will the credit quality trip?

Page 19: Crisil oct11

13

Calculating exposure at risk

Base case scenario:

Stress case scenario:

Clearly, lenders will be susceptible to increased asset quality pressures over the medium term.

However, the central and state governments are undertaking reform measures, especially to

help the SPUs pass on rising costs and reduce losses. CRISIL estimates the exposure in the

lenders' (banks and NBFC-IFCs, combined) power sector portfolio as on March 31, 2011, as

susceptible to the risk of slippages to NPAs by end-March 2013, as follows (see Table 2):l Implementation of reform measures as expected by CRISIL over the

next 12 to 18 months (refer to article, 'Power distribution utilities - current issues and

what lies ahead’ for details).l No major reforms are implemented, resulting in further weakening

in the SPUs' performance

Table 2: Lenders' exposure at risk

* refer to Annexure I for the key assumptions

As Table 2 indicates, lenders to the power sector will be able to cope with increased asset

quality challenges under the base-case scenario. Their capital coverage for exposure at risk

will remain adequate at around 7.4 times.

Under the stress-case scenario, however, asset quality will be adversely impacted, with net

worth coverage for exposure at risk declining to about 4.9 times. The impact will, however,

vary from lender to lender. Banks with their diversified loan portfolio will be in a better

position to manage the impact, while specialised lenders such as PFC and REC will be more

vulnerable, given their high sectoral concentration and large exposure to weak SPUs. Under

the stress-case scenario, the specialised lenders' net worth coverage for exposure at risk is

likely to be between 1 and 2 times, and will require capital infusions to maintain adequate

coverage for increased NPAs. Hence, timeliness in the implementation of reforms will remain a

key rating monitorable for lenders to the power sector over the next 12 to 18 months.

Base Case Stress Case

Exposure at Risk *

Highest Risk (SPUs) Rs. Bn. 121 363

High Risk (SPUs) Rs. Bn. 45 91

Private Sector Rs. Bn. 53 105

Total Exposure at Risk Rs. Bn. 219 559

Total Power Sector Advances Rs. Bn. 4828 4828

Exposure at Risk Per Cent 4.5 11.6

Net Worth / Exposure At Risk Times 7.4 4.9

Annexure I

Assumptions in calculating lenders' exposure at risk

CRISIL has factored in the following percentages of lenders' SPU and private sector exposures

to be at risk:

For SPUs

Proportion of exposure at risk under

Highest risk category 10 30

High risk category 5 10

Private sector projects 5 10

Base Case Stress Case

In the case of banks, net worth / exposure at risk calculation factors in their power sector

exposure at risk and NPAs from other sectors.

In per cent

Credit quality of power sector lenders - potential risks ahead

Power Sector Lenders: Will the credit quality trip?

Page 20: Crisil oct11

15

Power distribution utilities - current issues and what lies ahead

Executive Summary

Power distribution companies' (discoms') losses have been mounting at a rapid rate. The net

losses (subsidy booked basis) are estimated to have increased from Rs.275 billion in 2009-10 to

Rs.350-400 billion in 2010-11. As per CRISIL's analysis, there are three key reasons for the

increasing losses:1 Increasing gap between average revenue realized per unit (ARR) and average cost of

supply per unit (ACS) due to inadequate and delayed tariff revision2. high, though improving, level of aggregate technical and commercial (AT&C) losses3. high and increasing levels of outstanding debt on discoms' balance sheets, resulting in

higher interest costs

On account of the emotive reaction to power tariff hikes as well as the lack of political will to

administer them, many discoms either did not file for tariff revisions or were allowed only

minimal tariff hikes by the state electricity regulatory commissions (SERCs). Most discoms

have also been unsuccessful in bringing about any meaningful reduction in AT&C losses. The

aforementioned factors, coupled with increasing power purchase costs, have led to a

widening revenue gap. The under-recoveries and inefficiencies have also led to increasing

debt levels in discoms, resulting in high interest burden and, consequently, increasing losses

for the discoms.

Profitability pressures for discoms are expected to increase further over the medium term

because of fuel-related risks, escalating capital costs, and project-related risks on the power

generation front (refer to CRISIL's opinion piece titled 'Risks related to fuel and project

execution will increase power generation costs').

The subsidies extended to the discoms by the state governments have also been delayed,

leading to the discom's increased dependence on short-term debt for funding the losses.

Large loss-funding is estimated to have taken discom debt (net of state government loans) to

around Rs.2.1 trillion as on March 31, 2011, as against Rs.1.5 trillion as on March 31, 2010. The

pressure-alleviating factor in the scenario is the 12-point resolution adopted by the state

power ministers and the tariff hikes recently announced by some states. As banks and power

financiers have begun to link disbursals with discoms' performance, the discoms are expected

to take some corrective measures in the form of tariff hikes and AT&C loss reductions higher

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Page 21: Crisil oct11

15

Power distribution utilities - current issues and what lies ahead

Executive Summary

Power distribution companies' (discoms') losses have been mounting at a rapid rate. The net

losses (subsidy booked basis) are estimated to have increased from Rs.275 billion in 2009-10 to

Rs.350-400 billion in 2010-11. As per CRISIL's analysis, there are three key reasons for the

increasing losses:1 Increasing gap between average revenue realized per unit (ARR) and average cost of

supply per unit (ACS) due to inadequate and delayed tariff revision2. high, though improving, level of aggregate technical and commercial (AT&C) losses3. high and increasing levels of outstanding debt on discoms' balance sheets, resulting in

higher interest costs

On account of the emotive reaction to power tariff hikes as well as the lack of political will to

administer them, many discoms either did not file for tariff revisions or were allowed only

minimal tariff hikes by the state electricity regulatory commissions (SERCs). Most discoms

have also been unsuccessful in bringing about any meaningful reduction in AT&C losses. The

aforementioned factors, coupled with increasing power purchase costs, have led to a

widening revenue gap. The under-recoveries and inefficiencies have also led to increasing

debt levels in discoms, resulting in high interest burden and, consequently, increasing losses

for the discoms.

Profitability pressures for discoms are expected to increase further over the medium term

because of fuel-related risks, escalating capital costs, and project-related risks on the power

generation front (refer to CRISIL's opinion piece titled 'Risks related to fuel and project

execution will increase power generation costs').

The subsidies extended to the discoms by the state governments have also been delayed,

leading to the discom's increased dependence on short-term debt for funding the losses.

Large loss-funding is estimated to have taken discom debt (net of state government loans) to

around Rs.2.1 trillion as on March 31, 2011, as against Rs.1.5 trillion as on March 31, 2010. The

pressure-alleviating factor in the scenario is the 12-point resolution adopted by the state

power ministers and the tariff hikes recently announced by some states. As banks and power

financiers have begun to link disbursals with discoms' performance, the discoms are expected

to take some corrective measures in the form of tariff hikes and AT&C loss reductions higher

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Page 22: Crisil oct11

17

than demonstrated historically. This also leads us to believe that state government's subsidy

levels will be higher than historical levels and will be disbursed in a timely manner.

Consequently, CRISIL's base case scenario expects that with adequate and timely support

from state governments, as committed in the 12 point resolution, the net losses (subsidy

booked basis) will be contained at broadly the same levels for 2011-12 and 2012-13. Even

though the rate of growth of losses will be significantly curtailed in the base case, outstanding

debt levels will still increase by more than 50 per cent from the current levels and reach Rs.3.3

trillion as on March 31, 2013.

CRISIL's analysis also reveals that without any subsidy support, discoms will need to hike

tariffs by about 47 per cent to break- even in 2011-12. Our optimistic scenario assumes

substantive increases in tariffs and reduction in AT&C losses coupled with even higher support

from state governments (compared to our base case). Our worst case scenario assumes status

quo on all the above counts. The worst case scenario will result in annual net losses (subsidy

booked basis) increasing to around Rs.600 billion by 2012-13.

The situation is not uniformly bad across the entire power distribution sector; nine states of

Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh (UP), Madhya Pradesh (MP),

Jharkhand, and Andhra Pradesh (AP) account for the bulk of the problem in the sector. The

combined losses of discoms in these nine states constitute 85 per cent of the total distribution

sector losses and the combined debt of the discoms in these states constitutes nearly 80 per

cent of the all India discom debt.

CRISIL believes that the discoms will continue to be the weakest link in the power value chain.

While the efforts by state governments and ministry of power are a meaningful and concerted

attempt at addressing the issues that have been bogging down the power distribution sector,

it is the seriousness and urgency with which the proposed measures are implemented, which

will be crucial.

CRISIL's study covers 57 discoms and integrated power utilities selling directly to consumers

across 30 states and union territories in India.

Scope of the study

Losses mounting at a rapid rate, estimated in the range of Rs.350 - 400 billion for 2010-11

At an aggregate level, net losses (subsidy booked basis) of discoms increased at a compound

annual growth rate (CAGR) of 24 per cent between 2006-07 and 2009-10 to reach Rs.275

billion (refer to Chart 1). CRISIL estimates net losses subsidy booked basis, in the range of Rs.

350 - 400 billion for 2010-11.

The three main reasons for increasing losses of the discom sector are: 1. Increasing levels of ARR-ACS gap due to inadequate and delayed tariff revision2. high, though improving, level of AT&C losses3. high and increasing levels of outstanding debt, resulting in higher interest costs

We discuss the three key contributors to the losses in greater detail:

1. Increasing ARR-ACS gap due to delayed and inadequate tariff revision

2The gap (without subsidy) increased from Rs.0.49/kilowatt-hour (kwh) in 2006-07 to

Rs.0.86/kwh in 2009-10 (refer to Chart 2).

The upward trajectory of gap per unit is explained by the fact that while power procurement

cost and wage bills - together both these cost heads account for 82 per cent of the discoms'

costs (refer to Chart 3) - were increasing, lack of political will to revise tariffs resulted in growth

rate of ACS outpacing the rate at which ARR increased. Between 2006-07 and 2009-10, the

cost of procuring power and wage bills per unit increased by 10 per cent each, resulting in ACS

growth of 9 per cent.

Power distribution utilities - current issues and what lies ahead

Power Sector Lenders: Will the credit quality trip?

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Chart 1: Discom’s Losses

(650)

(500)

(350)

(200)

(50)

2006-07 2007-08 2008-09 2009-10

(Rs. Billion)Net Losses (without subsidy) Net Losses (subsidy booked basis)

Net Losses (subsidy received basis)

Page 23: Crisil oct11

17

than demonstrated historically. This also leads us to believe that state government's subsidy

levels will be higher than historical levels and will be disbursed in a timely manner.

Consequently, CRISIL's base case scenario expects that with adequate and timely support

from state governments, as committed in the 12 point resolution, the net losses (subsidy

booked basis) will be contained at broadly the same levels for 2011-12 and 2012-13. Even

though the rate of growth of losses will be significantly curtailed in the base case, outstanding

debt levels will still increase by more than 50 per cent from the current levels and reach Rs.3.3

trillion as on March 31, 2013.

CRISIL's analysis also reveals that without any subsidy support, discoms will need to hike

tariffs by about 47 per cent to break- even in 2011-12. Our optimistic scenario assumes

substantive increases in tariffs and reduction in AT&C losses coupled with even higher support

from state governments (compared to our base case). Our worst case scenario assumes status

quo on all the above counts. The worst case scenario will result in annual net losses (subsidy

booked basis) increasing to around Rs.600 billion by 2012-13.

The situation is not uniformly bad across the entire power distribution sector; nine states of

Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh (UP), Madhya Pradesh (MP),

Jharkhand, and Andhra Pradesh (AP) account for the bulk of the problem in the sector. The

combined losses of discoms in these nine states constitute 85 per cent of the total distribution

sector losses and the combined debt of the discoms in these states constitutes nearly 80 per

cent of the all India discom debt.

CRISIL believes that the discoms will continue to be the weakest link in the power value chain.

While the efforts by state governments and ministry of power are a meaningful and concerted

attempt at addressing the issues that have been bogging down the power distribution sector,

it is the seriousness and urgency with which the proposed measures are implemented, which

will be crucial.

CRISIL's study covers 57 discoms and integrated power utilities selling directly to consumers

across 30 states and union territories in India.

Scope of the study

Losses mounting at a rapid rate, estimated in the range of Rs.350 - 400 billion for 2010-11

At an aggregate level, net losses (subsidy booked basis) of discoms increased at a compound

annual growth rate (CAGR) of 24 per cent between 2006-07 and 2009-10 to reach Rs.275

billion (refer to Chart 1). CRISIL estimates net losses subsidy booked basis, in the range of Rs.

350 - 400 billion for 2010-11.

The three main reasons for increasing losses of the discom sector are: 1. Increasing levels of ARR-ACS gap due to inadequate and delayed tariff revision2. high, though improving, level of AT&C losses3. high and increasing levels of outstanding debt, resulting in higher interest costs

We discuss the three key contributors to the losses in greater detail:

1. Increasing ARR-ACS gap due to delayed and inadequate tariff revision

2The gap (without subsidy) increased from Rs.0.49/kilowatt-hour (kwh) in 2006-07 to

Rs.0.86/kwh in 2009-10 (refer to Chart 2).

The upward trajectory of gap per unit is explained by the fact that while power procurement

cost and wage bills - together both these cost heads account for 82 per cent of the discoms'

costs (refer to Chart 3) - were increasing, lack of political will to revise tariffs resulted in growth

rate of ACS outpacing the rate at which ARR increased. Between 2006-07 and 2009-10, the

cost of procuring power and wage bills per unit increased by 10 per cent each, resulting in ACS

growth of 9 per cent.

Power distribution utilities - current issues and what lies ahead

Power Sector Lenders: Will the credit quality trip?

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Chart 1: Discom’s Losses

(650)

(500)

(350)

(200)

(50)

2006-07 2007-08 2008-09 2009-10

(Rs. Billion)Net Losses (without subsidy) Net Losses (subsidy booked basis)

Net Losses (subsidy received basis)

Page 24: Crisil oct11

Note: Gap = Average Cost of Supply – Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total

Revenue/Net Input EnergySource: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

19

On the other hand, tariff hikes have been few and far between and insufficient to meet the

revenue gap in most cases; in some states no tariff revision has been implemented for years,

as evident from the ARR CAGR of only about 6 per cent between 2006-07 and 2009-10. In

most states, ARR petitions have not been filed in a timely manner and there is a substantial

time lag between successive revisions of tariff. For instance, Tamil Nadu announced a tariff

hike after a gap of seven years in 2010-11, that too in small measure; other states, including

Rajasthan, have announced a tariff increase for 2011-12 for the first time since 2005. In 2011-

12, some of the SERCs have announced tariff hikes; but in most cases, these will only partly

fund the revenue gaps. In fact, in most cases, tariff hikes allowed by SERCs are far lower than

the hikes petitioned for by the discoms (refer to Annexure I for details of recent tariff hikes in

some states).

The problem of under-recovery of ACS is exacerbated by the cross-subsidisation of cheap

power to the agriculture sector through differential tariffs for the domestic, commercial and

industrial consumer segments. In 2009-10, agriculture accounted for nearly 23 per cent of the

total power consumption in India (refer to Chart 4) but the revenue from sale of power to this

segment was only 6 per cent. This translated into an average tariff realisation of merely

Power distribution utilities - current issues and what lies ahead

Rs.0.89/kwh from the agriculture sector, against the tariff realisation of Rs.5.57/kwh,

Rs.4.48/kwh and Rs.2.64/kwh from commercial, industrial-high tension and domestic

consumer categories respectively. High consumption of power by the agriculture consumer

category, which continues to be highly subsidised in most states, makes it difficult to recoup

the entire revenue loss from other consumer categories. This issue is most glaring in Tamil

Nadu, Rajasthan and Punjab. Tamil Nadu, for instance, has modest AT&C loss of around 20 per

cent, which is significantly lower than the all-India median; but nearly 21 per cent of the

power sold in the state is to the subsidised agriculture consumer segment, resulting in a gap

(without subsidy) of Rs.1.61 per unit. The tariff recovery from other user segments is not

sufficient to cross-subsidise the free power sold to agriculture.

Chart 2: Widening Gap of Discoms Chart 3: Cost-wise break-up of ACS (2009-10)

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Power Sector Lenders: Will the credit quality trip?

1 Gap = Average Cost of Supply Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total Revenue/Net Input Energy

1 Gap = Average Cost of Supply Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total Revenue/Net Input Energy

2.39

3.41

2.93

2.76

3.54

2.62

2.27

2.68

2.00

2.50

3.00

3.50

2006-07 2007-08 2008-09 2009-10

(Rs./kwh)

Avg Cost of Supply (ACS) Average Revenue Realised [without subsidy] (ARR)

2.68

0.863.54

2.61

0.350.22

0.130.19

0.11

Power

Purchase

Wages Interest Generation Admin+Misc.

Expenses

Depreciation ACS ARR GAP

72% 10% 4%6% 3% 100%5%

(Rs./kwh)

Page 25: Crisil oct11

Note: Gap = Average Cost of Supply – Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total

Revenue/Net Input EnergySource: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

19

On the other hand, tariff hikes have been few and far between and insufficient to meet the

revenue gap in most cases; in some states no tariff revision has been implemented for years,

as evident from the ARR CAGR of only about 6 per cent between 2006-07 and 2009-10. In

most states, ARR petitions have not been filed in a timely manner and there is a substantial

time lag between successive revisions of tariff. For instance, Tamil Nadu announced a tariff

hike after a gap of seven years in 2010-11, that too in small measure; other states, including

Rajasthan, have announced a tariff increase for 2011-12 for the first time since 2005. In 2011-

12, some of the SERCs have announced tariff hikes; but in most cases, these will only partly

fund the revenue gaps. In fact, in most cases, tariff hikes allowed by SERCs are far lower than

the hikes petitioned for by the discoms (refer to Annexure I for details of recent tariff hikes in

some states).

The problem of under-recovery of ACS is exacerbated by the cross-subsidisation of cheap

power to the agriculture sector through differential tariffs for the domestic, commercial and

industrial consumer segments. In 2009-10, agriculture accounted for nearly 23 per cent of the

total power consumption in India (refer to Chart 4) but the revenue from sale of power to this

segment was only 6 per cent. This translated into an average tariff realisation of merely

Power distribution utilities - current issues and what lies ahead

Rs.0.89/kwh from the agriculture sector, against the tariff realisation of Rs.5.57/kwh,

Rs.4.48/kwh and Rs.2.64/kwh from commercial, industrial-high tension and domestic

consumer categories respectively. High consumption of power by the agriculture consumer

category, which continues to be highly subsidised in most states, makes it difficult to recoup

the entire revenue loss from other consumer categories. This issue is most glaring in Tamil

Nadu, Rajasthan and Punjab. Tamil Nadu, for instance, has modest AT&C loss of around 20 per

cent, which is significantly lower than the all-India median; but nearly 21 per cent of the

power sold in the state is to the subsidised agriculture consumer segment, resulting in a gap

(without subsidy) of Rs.1.61 per unit. The tariff recovery from other user segments is not

sufficient to cross-subsidise the free power sold to agriculture.

Chart 2: Widening Gap of Discoms Chart 3: Cost-wise break-up of ACS (2009-10)

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Power Sector Lenders: Will the credit quality trip?

1 Gap = Average Cost of Supply Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total Revenue/Net Input Energy

1 Gap = Average Cost of Supply Average Revenue Realised; where ACS = Total Expenditure/Net Input Energy and ARR = Total Revenue/Net Input Energy

2.39

3.41

2.93

2.76

3.54

2.62

2.27

2.68

2.00

2.50

3.00

3.50

2006-07 2007-08 2008-09 2009-10

(Rs./kwh)

Avg Cost of Supply (ACS) Average Revenue Realised [without subsidy] (ARR)

2.68

0.863.54

2.61

0.350.22

0.130.19

0.11

Power

Purchase

Wages Interest Generation Admin+Misc.

Expenses

Depreciation ACS ARR GAP

72% 10% 4%6% 3% 100%5%

(Rs./kwh)

Page 26: Crisil oct11

21

2. High level of AT&C losses

Faulty infrastructure and poor collection efficiency due to theft and un-metered connections

are also to be blamed for the losses in the sector. AT&C loss level in the sector was 27.2 per

cent in 2009-10 and was a substantial contributor to the overall net losses. Even though AT&C

losses have improved marginally to 27.2 per cent in 2009-10 from 30.6 per cent in 2006-07, at

an all-India level (refer to Chart 5), there is much to be desired in efficiency improvement and

infrastructure upgrade. While commercial losses were 4.2 per cent of net input energy, the

transmission and distribution (T&D) losses (units unbilled) were much higher at 23 per cent in

2009-10.

Power distribution utilities - current issues and what lies ahead

The resultant impact of under-recoveries and inefficiencies of the distribution sector is that

discoms' losses have increased significantly, their capital structures are in disarray, and the net

worth of many discoms has eroded.

The debt levels for discoms have increased by 20 per cent CAGR between 2006-07 and 2009-

10, with total outstanding debt of discoms at Rs.1768 billion as on March 31, 2010 (refer to

Chart 6). Of this, State Government loans were Rs.294 billion. The increase in debt levels has

resulted in a corresponding increase in interest burden. Of the 57 discoms that CRISIL has

analysed, 29 had negative net worths. Some states, including Delhi and West Bengal, took

steps and recapitalised their discoms in the past. We estimate that the debt levels (net of state

government loans) have increased to Rs.2.1 trillion as on March 31, 2011.

Due to large loss-funding, discom debt (net of state government loans) is estimated at

around Rs.3.3 trillion as on March 31, 2013

CRISIL's base case assumptions are as follows: l Power purchase cost, the single largest cost head for discoms, is the key contributor to the

increase in ACS. CRISIL's analysis of generation cost trends in India suggests that cost of

3. High debt level and interest costsChart 4: Consumer category-wise power consumption and revenues 2009-10

Chart 5: Increasing input energy (MU) and high AT&C losses (%)

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Chart 6: Rising debt levels… …Interest cost burden of Discoms

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Power Sector Lenders: Will the credit quality trip?

30.6%29.6%

27.7%

27.2%

0.15

0.2

0.25

0.3

0.35

0

100

200

300

400

500

600

700

800

2006-07 2007-08 2008-09 2009-10

(Billion Units)

Net Input Energy (LHS) Energy Sold (LHS) AT&C Losses in % (RHS)

200

400

600800

1,000

1,200

1,400

2,000

1,600

1,800

2007 2008 2009 2010

State Govt Loans Banks/FIs/Bonds

60 80 100 120 140 160

2007

2008

2009

2010

Interest cost

23%

26%36%

24%

20%

23%6%

8%

10%

8%

14%

2% 3%

Units Sold Revenues from Sale of Power

Bulk supply

Public water works

Railway

Interstate

Commercial

Industrial LT

Agriculture

Domestic

Industrial HT

(Rs. Billion)

Page 27: Crisil oct11

21

2. High level of AT&C losses

Faulty infrastructure and poor collection efficiency due to theft and un-metered connections

are also to be blamed for the losses in the sector. AT&C loss level in the sector was 27.2 per

cent in 2009-10 and was a substantial contributor to the overall net losses. Even though AT&C

losses have improved marginally to 27.2 per cent in 2009-10 from 30.6 per cent in 2006-07, at

an all-India level (refer to Chart 5), there is much to be desired in efficiency improvement and

infrastructure upgrade. While commercial losses were 4.2 per cent of net input energy, the

transmission and distribution (T&D) losses (units unbilled) were much higher at 23 per cent in

2009-10.

Power distribution utilities - current issues and what lies ahead

The resultant impact of under-recoveries and inefficiencies of the distribution sector is that

discoms' losses have increased significantly, their capital structures are in disarray, and the net

worth of many discoms has eroded.

The debt levels for discoms have increased by 20 per cent CAGR between 2006-07 and 2009-

10, with total outstanding debt of discoms at Rs.1768 billion as on March 31, 2010 (refer to

Chart 6). Of this, State Government loans were Rs.294 billion. The increase in debt levels has

resulted in a corresponding increase in interest burden. Of the 57 discoms that CRISIL has

analysed, 29 had negative net worths. Some states, including Delhi and West Bengal, took

steps and recapitalised their discoms in the past. We estimate that the debt levels (net of state

government loans) have increased to Rs.2.1 trillion as on March 31, 2011.

Due to large loss-funding, discom debt (net of state government loans) is estimated at

around Rs.3.3 trillion as on March 31, 2013

CRISIL's base case assumptions are as follows: l Power purchase cost, the single largest cost head for discoms, is the key contributor to the

increase in ACS. CRISIL's analysis of generation cost trends in India suggests that cost of

3. High debt level and interest costsChart 4: Consumer category-wise power consumption and revenues 2009-10

Chart 5: Increasing input energy (MU) and high AT&C losses (%)

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Chart 6: Rising debt levels… …Interest cost burden of Discoms

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Power Sector Lenders: Will the credit quality trip?

30.6%29.6%

27.7%

27.2%

0.15

0.2

0.25

0.3

0.35

0

100

200

300

400

500

600

700

800

2006-07 2007-08 2008-09 2009-10

(Billion Units)

Net Input Energy (LHS) Energy Sold (LHS) AT&C Losses in % (RHS)

200

400

600800

1,000

1,200

1,400

2,000

1,600

1,800

2007 2008 2009 2010

State Govt Loans Banks/FIs/Bonds

60 80 100 120 140 160

2007

2008

2009

2010

Interest cost

23%

26%36%

24%

20%

23%6%

8%

10%

8%

14%

2% 3%

Units Sold Revenues from Sale of Power

Bulk supply

Public water works

Railway

Interstate

Commercial

Industrial LT

Agriculture

Domestic

Industrial HT

(Rs. Billion)

Page 28: Crisil oct11

generation is likely to witness a 10-12 per cent growth between 2011-12 and 2012-13.

This cost increase is on account of escalation in fuel cost and increase in capital costs. l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes and curtailed

lending by banks.l Reduction of AT&C losses taking benefit of the Restructured Accelerated Power

Development & Reform Programme (R-APDRP). l State government subsidy to increase, given the fact that funding from banks and

financial institutions will not be available for weaker discoms, compelling the

governments to bridge the gap.

As per CRISIL's base case, the net loss (subsidy booked basis) will be contained at broadly the

same levels for 2011-12 and 2012-13. Even though the rate of growth of losses will be

significantly curtailed in the base case, outstanding debt levels will still increase by 25 per cent

per annum from the current levels and reach Rs.3.3 trillion by March 31, 2013. A large

portion of the incremental debt contracted by discoms will go towards loss-funding and

therefore will further add to the inefficiencies of the sector.

CRISIL's analysis reveals that discoms need to implement a 47 per cent tariff hike to attain

break-even in operations in 2011-12. Once the rate of increase in losses is arrested, the

discoms can begin to reduce their outstanding debt and deploy funds to address systemic

issues. However, 47 per cent tariff hikes may be difficult to implement because of political

compulsions. Therefore, CRISIL's optimistic case assumes significant tariff hikes in 2011-12

and 2012-13 along with increased state government support. On the other hand our

pessimistic scenario assumes status quo on all counts and highlights the importance of urgent

action. The worst case scenario will result in annual net losses (subsidy booked basis)

increasing to around Rs.600 billion by 2012-13.

CRISIL has analysed the credit risk profiles of discoms on their ARR-ACS gap, AT&C losses and

outstanding debt levels (refer Chart 7). The bubble graph plots the 15 most leveraged states

on these three key parameters, as CRISIL believes that these parameters adequately capture

the credit risk profiles of the discoms. These 15 states, along with Chhattisgarh, Orissa,

Discoms need to hike tariffs by 47 per cent to break-even in 2011-12

Few states account for bulk of the problem

23

Power distribution utilities - current issues and what lies ahead

Kerala, Uttarakhand and Jammu & Kashmir, are also amongst the top 20 energy-consuming

states in India.

l As is evident, the nine states, Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar

Pradesh, Madhya Pradesh, Jharkhand and Andhra Pradesh that feature in quadrant III and

IV account for the bulk of the power distribution sector problems and are the most

vulnerable from credit risk perspective. The discoms of these states are amongst the

highest loss-making discoms, with the most leveraged capital structures. Their net losses

(subsidy booked basis) accounted for about 85 per cent of the sector-wide losses.

Similarly, almost 80 per cent of the entire discom sector debt is concentrated in the

discoms of these states; the aggregate debt of the discoms of these states was more than

Rs.1.4 trillion as on March 31, 2010.

Power Sector Lenders: Will the credit quality trip?

Chart 7: Top 15 States by outstanding debt (~96% of Discom Debt) Discom profile of states

Note: 1. Outstanding debt includes state government loans. 2. Tamil Nadu, Punjab and Bihar were not unbundled as on March 31, 2010. The debt figures for these 3 states includes debt for

transmission and generation arms of the respective states also. Tamil Nadu and Punjab have been subsequently unbundled in

2010-11.Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

High Risk States

Low Risk States

Moderate Risk States

TN, 320

Rajasthan, 329

Punjab, 173

Bihar, 126

AP, 129

Haryana, 118

WB, 49

Jharkhand, 71

MP, 89

UP, 60

Mah.,66

Delhi, 60

Ktk, 40

Guj., 28

HP, 40

5%

15%

25%

35%

45%

0.35 0.15 0.65 1.15 1.65 2.15 2.65

Gap (Rs./kwh)

Outstanding Debt as on March 31, 2010 in Rs. Billion

AT&C Losses (%)

IVII

IIII

Page 29: Crisil oct11

generation is likely to witness a 10-12 per cent growth between 2011-12 and 2012-13.

This cost increase is on account of escalation in fuel cost and increase in capital costs. l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes and curtailed

lending by banks.l Reduction of AT&C losses taking benefit of the Restructured Accelerated Power

Development & Reform Programme (R-APDRP). l State government subsidy to increase, given the fact that funding from banks and

financial institutions will not be available for weaker discoms, compelling the

governments to bridge the gap.

As per CRISIL's base case, the net loss (subsidy booked basis) will be contained at broadly the

same levels for 2011-12 and 2012-13. Even though the rate of growth of losses will be

significantly curtailed in the base case, outstanding debt levels will still increase by 25 per cent

per annum from the current levels and reach Rs.3.3 trillion by March 31, 2013. A large

portion of the incremental debt contracted by discoms will go towards loss-funding and

therefore will further add to the inefficiencies of the sector.

CRISIL's analysis reveals that discoms need to implement a 47 per cent tariff hike to attain

break-even in operations in 2011-12. Once the rate of increase in losses is arrested, the

discoms can begin to reduce their outstanding debt and deploy funds to address systemic

issues. However, 47 per cent tariff hikes may be difficult to implement because of political

compulsions. Therefore, CRISIL's optimistic case assumes significant tariff hikes in 2011-12

and 2012-13 along with increased state government support. On the other hand our

pessimistic scenario assumes status quo on all counts and highlights the importance of urgent

action. The worst case scenario will result in annual net losses (subsidy booked basis)

increasing to around Rs.600 billion by 2012-13.

CRISIL has analysed the credit risk profiles of discoms on their ARR-ACS gap, AT&C losses and

outstanding debt levels (refer Chart 7). The bubble graph plots the 15 most leveraged states

on these three key parameters, as CRISIL believes that these parameters adequately capture

the credit risk profiles of the discoms. These 15 states, along with Chhattisgarh, Orissa,

Discoms need to hike tariffs by 47 per cent to break-even in 2011-12

Few states account for bulk of the problem

23

Power distribution utilities - current issues and what lies ahead

Kerala, Uttarakhand and Jammu & Kashmir, are also amongst the top 20 energy-consuming

states in India.

l As is evident, the nine states, Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar

Pradesh, Madhya Pradesh, Jharkhand and Andhra Pradesh that feature in quadrant III and

IV account for the bulk of the power distribution sector problems and are the most

vulnerable from credit risk perspective. The discoms of these states are amongst the

highest loss-making discoms, with the most leveraged capital structures. Their net losses

(subsidy booked basis) accounted for about 85 per cent of the sector-wide losses.

Similarly, almost 80 per cent of the entire discom sector debt is concentrated in the

discoms of these states; the aggregate debt of the discoms of these states was more than

Rs.1.4 trillion as on March 31, 2010.

Power Sector Lenders: Will the credit quality trip?

Chart 7: Top 15 States by outstanding debt (~96% of Discom Debt) Discom profile of states

Note: 1. Outstanding debt includes state government loans. 2. Tamil Nadu, Punjab and Bihar were not unbundled as on March 31, 2010. The debt figures for these 3 states includes debt for

transmission and generation arms of the respective states also. Tamil Nadu and Punjab have been subsequently unbundled in

2010-11.Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

High Risk States

Low Risk States

Moderate Risk States

TN, 320

Rajasthan, 329

Punjab, 173

Bihar, 126

AP, 129

Haryana, 118

WB, 49

Jharkhand, 71

MP, 89

UP, 60

Mah.,66

Delhi, 60

Ktk, 40

Guj., 28

HP, 40

5%

15%

25%

35%

45%

0.35 0.15 0.65 1.15 1.65 2.15 2.65

Gap (Rs./kwh)

Outstanding Debt as on March 31, 2010 in Rs. Billion

AT&C Losses (%)

IVII

IIII

Page 30: Crisil oct11

25

Power distribution utilities - current issues and what lies ahead

l The states featuring in Quadrant IV have high ARR-ACS gap and need to significantly bring

down their AT&C losses to bring about any meaningful improvement in their financial

profiles. However, within this quadrant, it is Rajasthan which could face the most distress

in view of its high debt levels. Bihar is plagued with high AT&C losses and has substantial

ARR-ACS gap. Also, its operations were not unbundled (as on March 31, 2010) and

therefore it has large outstanding debt. These states will have to implement significant

tariff hikes in tandem with steps to bring down AT&C losses for any sustainable

improvement in their financial profile.l The entities in quadrant III have lower AT&C loss levels than those in Quadrant IV, but in

view of their high levels of ARR-ACS gap and large debt levels in Tamil Nadu, AP and

Punjab, the risks remain high. The high debt levels in Tamil Nadu and Punjab are also

because of the bundled status of their operations on March 31, 2010, coupled with the

issue of high cross-subsidy for agriculture consumers. l Quadrant II entities such as Maharashtra face moderate risks from a credit stand point. In

case of Karnataka, the ARR-ACS gap is Rs.0.43/kwh while in case of Maharashtra, the gap is

only Rs.0.24. Both these states, however, have scope for improvement in AT&C, which

could aid in further improving their financial profiles. West Bengal has introduced

monthly variable cost adjustment that is intended to pass on any fuel hikes to customers.l Quadrant I discoms are the least vulnerable entities. The entities in Quadrant I Gujarat,

Delhi and Himachal Pradesh all have low levels of losses, and therefore their debt levels,

relative to their scale of operations, are manageable. Some of the states in quadrant I, for

instance, Delhi have witnessed widening gap from 2008-09 onwards. Delhi has, however,

recently announced a substantial tariff hike of 22 per cent. While the tariff hike is short of

the tariff petition filed by the discoms, the Delhi Electricity Regulatory Commission has

committed for similar hikes under multi-year tariff regime. Such measures are likely to

keep states in quadrant I in the least-vulnerable category.

State governments' ability to support the discoms vary

The adoption of an expansionary fiscal policy, implementation of pay commission

recommendations, coupled with the global economic slowdown, resulted in deterioration in

the key fiscal indicators at the state level in 2008-09 and 2009-10. The re-emergence of a

revenue deficit (RD) after three years and high capital outlay led to increase in gross fiscal

deficit (GFD) to gross state domestic product (GSDP) ratio across states in 2009-10. The states,

on a consolidated basis, reported RD of Rs.47 billion in 2009-10 (0.7 per cent of GDSP), as

against revenue surplus of Rs.13 billion (0.2 per cent of GSDP) in 2008-09, whereas the GFD

increased to Rs.216 billion (3.3 per cent of GSDP) in 2009-10 from Rs.135 billion (2.4 per cent

of GSDP) in 2008-09.

The aggregate power subsidies increased at a CAGR of about 36 per cent between 2006-07

and 2009-10. Delay in subsidy receipts from state governments began in 2008-09, when

nearly 46 per cent of the subsidy due to discoms from state governments was not received,

leading to an increased dependence on short-term loans for funding the losses (refer to Chart

8). Similar trend continued in 2009-10.

Healthy tax revenues (driven by continued economic growth), likelihood of adhering to strong

financial discipline parameters, and higher devolution of central tax revenues among states

Power Sector Lenders: Will the credit quality trip?

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Chart 8: Trend of subsidy booked versus subsidy received

0

50

100

150

200

250

300

350

400

(Rs.

Bill

ion

)

44% of the

subsidy booked

was not received

in 2009-10

2006-07 2007-08 2008-09 2009-10

Subsidy Booked Subsidy Received

Page 31: Crisil oct11

25

Power distribution utilities - current issues and what lies ahead

l The states featuring in Quadrant IV have high ARR-ACS gap and need to significantly bring

down their AT&C losses to bring about any meaningful improvement in their financial

profiles. However, within this quadrant, it is Rajasthan which could face the most distress

in view of its high debt levels. Bihar is plagued with high AT&C losses and has substantial

ARR-ACS gap. Also, its operations were not unbundled (as on March 31, 2010) and

therefore it has large outstanding debt. These states will have to implement significant

tariff hikes in tandem with steps to bring down AT&C losses for any sustainable

improvement in their financial profile.l The entities in quadrant III have lower AT&C loss levels than those in Quadrant IV, but in

view of their high levels of ARR-ACS gap and large debt levels in Tamil Nadu, AP and

Punjab, the risks remain high. The high debt levels in Tamil Nadu and Punjab are also

because of the bundled status of their operations on March 31, 2010, coupled with the

issue of high cross-subsidy for agriculture consumers. l Quadrant II entities such as Maharashtra face moderate risks from a credit stand point. In

case of Karnataka, the ARR-ACS gap is Rs.0.43/kwh while in case of Maharashtra, the gap is

only Rs.0.24. Both these states, however, have scope for improvement in AT&C, which

could aid in further improving their financial profiles. West Bengal has introduced

monthly variable cost adjustment that is intended to pass on any fuel hikes to customers.l Quadrant I discoms are the least vulnerable entities. The entities in Quadrant I Gujarat,

Delhi and Himachal Pradesh all have low levels of losses, and therefore their debt levels,

relative to their scale of operations, are manageable. Some of the states in quadrant I, for

instance, Delhi have witnessed widening gap from 2008-09 onwards. Delhi has, however,

recently announced a substantial tariff hike of 22 per cent. While the tariff hike is short of

the tariff petition filed by the discoms, the Delhi Electricity Regulatory Commission has

committed for similar hikes under multi-year tariff regime. Such measures are likely to

keep states in quadrant I in the least-vulnerable category.

State governments' ability to support the discoms vary

The adoption of an expansionary fiscal policy, implementation of pay commission

recommendations, coupled with the global economic slowdown, resulted in deterioration in

the key fiscal indicators at the state level in 2008-09 and 2009-10. The re-emergence of a

revenue deficit (RD) after three years and high capital outlay led to increase in gross fiscal

deficit (GFD) to gross state domestic product (GSDP) ratio across states in 2009-10. The states,

on a consolidated basis, reported RD of Rs.47 billion in 2009-10 (0.7 per cent of GDSP), as

against revenue surplus of Rs.13 billion (0.2 per cent of GSDP) in 2008-09, whereas the GFD

increased to Rs.216 billion (3.3 per cent of GSDP) in 2009-10 from Rs.135 billion (2.4 per cent

of GSDP) in 2008-09.

The aggregate power subsidies increased at a CAGR of about 36 per cent between 2006-07

and 2009-10. Delay in subsidy receipts from state governments began in 2008-09, when

nearly 46 per cent of the subsidy due to discoms from state governments was not received,

leading to an increased dependence on short-term loans for funding the losses (refer to Chart

8). Similar trend continued in 2009-10.

Healthy tax revenues (driven by continued economic growth), likelihood of adhering to strong

financial discipline parameters, and higher devolution of central tax revenues among states

Power Sector Lenders: Will the credit quality trip?

Source: Performance of State Power Utilities, Power Finance Corporation, CRISIL Analysis

Chart 8: Trend of subsidy booked versus subsidy received

0

50

100

150

200

250

300

350

400

(Rs.

Bill

ion

)

44% of the

subsidy booked

was not received

in 2009-10

2006-07 2007-08 2008-09 2009-10

Subsidy Booked Subsidy Received

Page 32: Crisil oct11

27

Power distribution utilities - current issues and what lies ahead

recommended by the Thirteenth Finance Commission, are likely to support the state finances,

mounting losses and increasing support required by state power utilities (including discoms)

could significantly constrain the state finances over the near to medium term.

Based on the analysis of states' financial profiles, CRISIL has grouped state governments into

four risk clusters (refer to Table 1). The states in Cluster I have the lowest risk, while those in

Cluster IV are the most vulnerable. Thus, the states which are already saddled with their own

debt and in clusters III and IV might not be in a position to further support their discoms in

distress situation.

CRISIL believes that the 12-point resolution adopted by the state power ministers and recent

tariff hikes announced by some states will ensure that losses are at least contained at current

levels, if not completely wiped out. Over the past three months, at least five states have

announced tariff hikes for the year 2011-12. While these tariff hikes fall short of the required

increase to bridge the losses, some states have announced hikes, though after long gaps,

which is an encouraging sign. CRISIL believes that such hikes will have to continue over the

medium term, despite political compulsions, in order to bridge the large revenue gap. At the

same time, state government support, in the form of timely and increased subsidy disbursal,

will have to materialise to address the funding requirements. While the efforts by state

governments and ministry of power are a meaningful and concerted attempt at addressing

the concerns that have been bogging down the power distribution sector, it is the seriousness

and urgency with which the proposed measures are implemented which will be crucial.

Conclusion

Table 1: Risk Clustering of State Governments

Karnataka, DelhiCluster I (Highest ability to support)

Gujarat, Maharashtra, Andhra Pradesh, Haryana, Tamil Nadu, Chhatisgarh, GoaCluster II

Uttar Pradesh, Madhya Pradesh, Jharkhand, Punjab, Rajasthan, Puducherry, Orissa, Kerala, Assam, Uttarakhand

Cluster III

Himachal Pradesh, West Bengal, Bihar, Sikkim, Arunachal Pradesh, Meghalaya, Tripura, Jammu & Kashmir, Manipur, Nagaland, Mizoram

Cluster IV (Lowest ability to suppport)

Parameters States

Power Sector Lenders: Will the credit quality trip?

Annexure I

Annexure II

Status of Latest Tariff Hikes in Select States

Financial Metrics for Risk Clustering of State Governments

State Tariff Hikes Remarks

Andhra Pradesh 2% Only tariff for domestic and industry consumers increased.

Delhi 22% Tariff hikes across consumer categories

Gujarat 2.6-4.7% Tariff hikes across consumer categories

Jharkhand 16.50% Tariff hikes across consumer categories

Maharashtra 17% Tariff hikes across consumer categories

Orissa 20%

Punjab 7-12% Last hike in 2010. But varrying hikes for consumers categories.

Rajasthan 15-30% Across categories. Tariff hike after 2005.

Tamil Nadu 3% Tariff Hike after 7 years and only for domestic consumers

Bihar 19% Tariff hike petitioned by board was 65%

West Bengal

Source: SERCs, CRISIL Analysis

Introduction of monthly variable cost adjustment

Parameters Financial Ratios Analysed

Fiscal Management Revenue Deficit/Revenue Receipt (RR)

Gross Fiscal Deficit (GFD)/Gross State Domestic Product (GSDP)

Capital Outlay/GSDP

Non-Developmental Revenue Expenditure/RR

Self Reliance State's Own Tax Revenues/GSDPCentral Devolutions/RR

Own Revenues/Revenue Expenditure

Debt Servicing Capability (Debt+Guarantees)/GSDP

(Debt+Guarantees)/RR

RR/Interest

Page 33: Crisil oct11

27

Power distribution utilities - current issues and what lies ahead

recommended by the Thirteenth Finance Commission, are likely to support the state finances,

mounting losses and increasing support required by state power utilities (including discoms)

could significantly constrain the state finances over the near to medium term.

Based on the analysis of states' financial profiles, CRISIL has grouped state governments into

four risk clusters (refer to Table 1). The states in Cluster I have the lowest risk, while those in

Cluster IV are the most vulnerable. Thus, the states which are already saddled with their own

debt and in clusters III and IV might not be in a position to further support their discoms in

distress situation.

CRISIL believes that the 12-point resolution adopted by the state power ministers and recent

tariff hikes announced by some states will ensure that losses are at least contained at current

levels, if not completely wiped out. Over the past three months, at least five states have

announced tariff hikes for the year 2011-12. While these tariff hikes fall short of the required

increase to bridge the losses, some states have announced hikes, though after long gaps,

which is an encouraging sign. CRISIL believes that such hikes will have to continue over the

medium term, despite political compulsions, in order to bridge the large revenue gap. At the

same time, state government support, in the form of timely and increased subsidy disbursal,

will have to materialise to address the funding requirements. While the efforts by state

governments and ministry of power are a meaningful and concerted attempt at addressing

the concerns that have been bogging down the power distribution sector, it is the seriousness

and urgency with which the proposed measures are implemented which will be crucial.

Conclusion

Table 1: Risk Clustering of State Governments

Karnataka, DelhiCluster I (Highest ability to support)

Gujarat, Maharashtra, Andhra Pradesh, Haryana, Tamil Nadu, Chhatisgarh, GoaCluster II

Uttar Pradesh, Madhya Pradesh, Jharkhand, Punjab, Rajasthan, Puducherry, Orissa, Kerala, Assam, Uttarakhand

Cluster III

Himachal Pradesh, West Bengal, Bihar, Sikkim, Arunachal Pradesh, Meghalaya, Tripura, Jammu & Kashmir, Manipur, Nagaland, Mizoram

Cluster IV (Lowest ability to suppport)

Parameters States

Power Sector Lenders: Will the credit quality trip?

Annexure I

Annexure II

Status of Latest Tariff Hikes in Select States

Financial Metrics for Risk Clustering of State Governments

State Tariff Hikes Remarks

Andhra Pradesh 2% Only tariff for domestic and industry consumers increased.

Delhi 22% Tariff hikes across consumer categories

Gujarat 2.6-4.7% Tariff hikes across consumer categories

Jharkhand 16.50% Tariff hikes across consumer categories

Maharashtra 17% Tariff hikes across consumer categories

Orissa 20%

Punjab 7-12% Last hike in 2010. But varrying hikes for consumers categories.

Rajasthan 15-30% Across categories. Tariff hike after 2005.

Tamil Nadu 3% Tariff Hike after 7 years and only for domestic consumers

Bihar 19% Tariff hike petitioned by board was 65%

West Bengal

Source: SERCs, CRISIL Analysis

Introduction of monthly variable cost adjustment

Parameters Financial Ratios Analysed

Fiscal Management Revenue Deficit/Revenue Receipt (RR)

Gross Fiscal Deficit (GFD)/Gross State Domestic Product (GSDP)

Capital Outlay/GSDP

Non-Developmental Revenue Expenditure/RR

Self Reliance State's Own Tax Revenues/GSDPCentral Devolutions/RR

Own Revenues/Revenue Expenditure

Debt Servicing Capability (Debt+Guarantees)/GSDP

(Debt+Guarantees)/RR

RR/Interest

Page 34: Crisil oct11

29

Risks related to fuel and project execution will increase power generation costs

Executive Summary

Thermal capacity additions to drive increase in generation capacity in India

The power generation sector today faces a key structural threat in the form of fuel availability

and pricing. CRISIL believes that significant constraints in domestic availability of fuel will lead

to increased reliance on imported fuel, which is costlier. This, coupled with project execution

risks, has the potential to delay project implementation and raise the cost of generation

substantially for upcoming capacities. CRISIL believes that the impact of these risks will be

threefold: a) procurement costs for the distribution companies (discoms) will increase by 10 to

12 per cent; b) further weakening in discoms' financial risk profiles will lead to stretch in

receivables for the generation sector; and c) rising fuel bill will impact generation capacities

which have part or no fuel price pass through, which could result in deferral of projects.

This article outlines the increased risks in the operating environment, mainly for thermal

capacities, as these are the key sources of power in the country, and the impact of these risks

on the generation sector as well as the discoms.

Encouraged by the Government of India's policy initiatives to attract investment in the power

sector, large capacity addition plans have been announced in the sector. Capacity additions

totaling 65 gigawatts (GW) are planned between 2011-12 (refers to financial year, April 1 to

March 31) and 2014-15, to increase India's total power generation capacity to 239 GW by the

end of 2014-15. Nearly 89 per cent of the planned capacity additions are based on coal, gas, or

lignite, which would increase the thermal capacity proportion in India's total generation mix

to over 70 per cent by the end of 2014-15 from 65 per cent currently.

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Annexure III

2Status of Reforms & Restructuring in States

2 Unbundling has been done in Punjab and Tamil Nadu after April 21, 2010; privatisation has

only happened in Delhi and Orissa

23Open Access Regulation

9Multi Year Tariff/ ARR Order IssuedDistribution Reforms

23Issuing Tariff Orders

26Operational

28ConstitutedSERC

2Privatisation of Distribution

20Unbundling/Corporatisaion – Implemented*Unbundling/Corporatisaion

No. of State where implemented (out of 29 States)

ParticularsReform/Restructure Agenda

Page 35: Crisil oct11

29

Risks related to fuel and project execution will increase power generation costs

Executive Summary

Thermal capacity additions to drive increase in generation capacity in India

The power generation sector today faces a key structural threat in the form of fuel availability

and pricing. CRISIL believes that significant constraints in domestic availability of fuel will lead

to increased reliance on imported fuel, which is costlier. This, coupled with project execution

risks, has the potential to delay project implementation and raise the cost of generation

substantially for upcoming capacities. CRISIL believes that the impact of these risks will be

threefold: a) procurement costs for the distribution companies (discoms) will increase by 10 to

12 per cent; b) further weakening in discoms' financial risk profiles will lead to stretch in

receivables for the generation sector; and c) rising fuel bill will impact generation capacities

which have part or no fuel price pass through, which could result in deferral of projects.

This article outlines the increased risks in the operating environment, mainly for thermal

capacities, as these are the key sources of power in the country, and the impact of these risks

on the generation sector as well as the discoms.

Encouraged by the Government of India's policy initiatives to attract investment in the power

sector, large capacity addition plans have been announced in the sector. Capacity additions

totaling 65 gigawatts (GW) are planned between 2011-12 (refers to financial year, April 1 to

March 31) and 2014-15, to increase India's total power generation capacity to 239 GW by the

end of 2014-15. Nearly 89 per cent of the planned capacity additions are based on coal, gas, or

lignite, which would increase the thermal capacity proportion in India's total generation mix

to over 70 per cent by the end of 2014-15 from 65 per cent currently.

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Annexure III

2Status of Reforms & Restructuring in States

2 Unbundling has been done in Punjab and Tamil Nadu after April 21, 2010; privatisation has

only happened in Delhi and Orissa

23Open Access Regulation

9Multi Year Tariff/ ARR Order IssuedDistribution Reforms

23Issuing Tariff Orders

26Operational

28ConstitutedSERC

2Privatisation of Distribution

20Unbundling/Corporatisaion – Implemented*Unbundling/Corporatisaion

No. of State where implemented (out of 29 States)

ParticularsReform/Restructure Agenda

Page 36: Crisil oct11

1 While these capacity additions are imperative, in view of the current high energy deficit

levels (peak power deficit and energy deficit were 9.8 and 8.5 per cent, respectively, in 2010-

11), in view of the past slippages in implementation and increased risks in the operating

environment, driven by increased fuel and project execution risks, it is likely that some of

these planned additions may not materialise.

Of the revised target of 50,756 megawatts (MW) of thermal capacity to be added during the

Eleventh Five Year Plan, actual capacity addition till 2010-11 has been only 29,461 MW.CRISIL

has observed time and cost overruns in various projects under implementation. While most

private sector promoters have experience in setting up power generation capacities, the

projects announced/under implementation are nearly 4 times the operational capacities. This

leads to increased challenges in terms of tying up financing for the project and bringing in large

equity commitments for the planned projects. Furthermore, issues related to project

complexity, delay in land acquisition and clearances, and bottlenecks in equipment supply are

listed below:1. Project complexity and delays in land acquisition The increased project complexity is evidenced by the fact that while the largest subcritical

boiler turbine generator (BTG) package was 600 MW a few years ago, BTG packages based on

supercritical technology can now be as large as 800 MW. The execution is also significantly

impacted by delays in land acquisition, necessitating increased focus of the project companies

i. There have been significant delays in project execution on account of multiple reasons.

Risks related to fuel and project execution will increase power generation costs

on resettlement and rehabilitation issues. Delays in land acquisition can impact not only the

implementation of the power project, but also the associated evacuation infrastructure as

well.2. Gradual ramp-up in domestic equipment supply capacityAs compared to the fast pace of planned capacity additions, the ramp-up in domestic

equipment capacity has been gradual, resulting in delays in supply of equipment. CRISIL has

observed delays ranging from 3 to 12 months in supply of equipment, which has, in turn,

impacted implementation.

3. Delay in receipt of environmental and forest clearancesEnvironmental clearances impact the pace of financial closure and are pre-requisites for

signing fuel supply agreements (FSAs) with Coal India Ltd (CIL) and its subsidiaries. CRISIL has

observed significant delays on this front, impacting financial closure and leading to delays in

project implementation.

Time overruns result in cost overruns on account of rising interest during construction. As

most projects are ongoing, the final cost overruns cannot be determined. However, the extent

to which the cost overruns will be allowed as a pass-through will determine the increase in

tariff; the impact of the same will be spread over the life of the project.

In an environment marked by rising trend in inflation, interest rates and unfavourable

movements in foreign exchange rates, CRISIL believes that delays in project execution and

consequent cost overruns will result in an increase in cost of generation. The nature of the

agreements signed between the developers and the offtakers will determine its impact on

project viability.

The domestic power generation sector's current demand for coal and gas is 427 million tonnes

per annum and 72 million metric standard cubic meters per day (mmscmd), respectively.

Demand for fuel by coal- and gas-based plants is increasing at a faster rate than the supply.

The demand for coal from the power sector registered a compound annual growth rate

(CAGR) of 9 per cent over the past four years in line with the capacity addition; on the other

hand, the domestic supply of coal registered a CAGR of only 6 per cent over the period. The

factors constraining growth in the supply of coal are varied and include delays in receipt of

ii. Structural shift in fuel supply dynamics to result in increased reliance on imported fuel

65% 64% 63% 64% 65%

26% 25% 25% 23% 22%

6% 8% 9% 10% 10%

3% 3% 3% 3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006-07 2007-08 2008-09 2009-10 2010-11

Thermal Hydel Renewable Nuclear

1215

17

21

174

239

0

50

100

150

200

250

300

2010-11 2011-12 2012-13 2013-14 2014-15

Chart I - Dominant source of power: thermal Chart II - Annual capacity additions (GW)

1 Source: CRISIL Research, CRISIL Ratings, company websites, media

Power Sector Lenders: Will the credit quality trip? 31

Page 37: Crisil oct11

1 While these capacity additions are imperative, in view of the current high energy deficit

levels (peak power deficit and energy deficit were 9.8 and 8.5 per cent, respectively, in 2010-

11), in view of the past slippages in implementation and increased risks in the operating

environment, driven by increased fuel and project execution risks, it is likely that some of

these planned additions may not materialise.

Of the revised target of 50,756 megawatts (MW) of thermal capacity to be added during the

Eleventh Five Year Plan, actual capacity addition till 2010-11 has been only 29,461 MW.CRISIL

has observed time and cost overruns in various projects under implementation. While most

private sector promoters have experience in setting up power generation capacities, the

projects announced/under implementation are nearly 4 times the operational capacities. This

leads to increased challenges in terms of tying up financing for the project and bringing in large

equity commitments for the planned projects. Furthermore, issues related to project

complexity, delay in land acquisition and clearances, and bottlenecks in equipment supply are

listed below:1. Project complexity and delays in land acquisition The increased project complexity is evidenced by the fact that while the largest subcritical

boiler turbine generator (BTG) package was 600 MW a few years ago, BTG packages based on

supercritical technology can now be as large as 800 MW. The execution is also significantly

impacted by delays in land acquisition, necessitating increased focus of the project companies

i. There have been significant delays in project execution on account of multiple reasons.

Risks related to fuel and project execution will increase power generation costs

on resettlement and rehabilitation issues. Delays in land acquisition can impact not only the

implementation of the power project, but also the associated evacuation infrastructure as

well.2. Gradual ramp-up in domestic equipment supply capacityAs compared to the fast pace of planned capacity additions, the ramp-up in domestic

equipment capacity has been gradual, resulting in delays in supply of equipment. CRISIL has

observed delays ranging from 3 to 12 months in supply of equipment, which has, in turn,

impacted implementation.

3. Delay in receipt of environmental and forest clearancesEnvironmental clearances impact the pace of financial closure and are pre-requisites for

signing fuel supply agreements (FSAs) with Coal India Ltd (CIL) and its subsidiaries. CRISIL has

observed significant delays on this front, impacting financial closure and leading to delays in

project implementation.

Time overruns result in cost overruns on account of rising interest during construction. As

most projects are ongoing, the final cost overruns cannot be determined. However, the extent

to which the cost overruns will be allowed as a pass-through will determine the increase in

tariff; the impact of the same will be spread over the life of the project.

In an environment marked by rising trend in inflation, interest rates and unfavourable

movements in foreign exchange rates, CRISIL believes that delays in project execution and

consequent cost overruns will result in an increase in cost of generation. The nature of the

agreements signed between the developers and the offtakers will determine its impact on

project viability.

The domestic power generation sector's current demand for coal and gas is 427 million tonnes

per annum and 72 million metric standard cubic meters per day (mmscmd), respectively.

Demand for fuel by coal- and gas-based plants is increasing at a faster rate than the supply.

The demand for coal from the power sector registered a compound annual growth rate

(CAGR) of 9 per cent over the past four years in line with the capacity addition; on the other

hand, the domestic supply of coal registered a CAGR of only 6 per cent over the period. The

factors constraining growth in the supply of coal are varied and include delays in receipt of

ii. Structural shift in fuel supply dynamics to result in increased reliance on imported fuel

65% 64% 63% 64% 65%

26% 25% 25% 23% 22%

6% 8% 9% 10% 10%

3% 3% 3% 3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006-07 2007-08 2008-09 2009-10 2010-11

Thermal Hydel Renewable Nuclear

1215

17

21

174

239

0

50

100

150

200

250

300

2010-11 2011-12 2012-13 2013-14 2014-15

Chart I - Dominant source of power: thermal Chart II - Annual capacity additions (GW)

1 Source: CRISIL Research, CRISIL Ratings, company websites, media

Power Sector Lenders: Will the credit quality trip? 31

Page 38: Crisil oct11

33

Risks related to fuel and project execution will increase power generation costs

environmental and forest clearances and in land acquisition, and local law and order

problems.

Owing to the moderate growth in supply, no new FSA has been signed after March 2009.

CRISIL estimates that the annual demand for coal from the power sector will increase to as

much as 750 million tonnes by 2014-15 depending on pace of capacity additions.

In the absence of similar growth in domestic coal supply, the annual demand-supply gap is

expected to increase to over 200 million tonnes by 2014-15, taking the proportion of

imported coal in coal mix to 26 per cent from around 12 per cent currently.

Consequently, it is likely that CIL will commit to provide domestic fuel only to the extent of 50

per cent of the annual contracted quantity for plants commissioned in the Twelfth Five Year

Plan. CRISIL believes that more than 80 per cent of the projects commissioned from 2011-12 2will have a fuel linkage only in the form of Memorandum of Understanding or tapering

linkage. These projects will, therefore, have to increasingly rely on higher coal imports to meet

fuel needs; imported fuel is nearly 2.5 times to 3 times costlier (on a landed cost basis) than

domestic coal on a calorie-adjusted basis, thus increasing the fuel bill.

Gas-based plants are also vulnerable to decline in production from the Krishna Godavari (KG)

basin. Decline in production from the KG basin increased the gas demand-supply gap for the

2 Memorandum of Understanding has to be renewed every year, thereby posing risks on account of potential delays in renewal, as

against FSAs which are relatively long-term agreements, ranging between 20 to 25 years.

power sector to 7 mmscmd in 2010-11 from 1 mmscmd in 2009-10. This gap has been filled by

costlier imported regassified liquefied natural gas (R-LNG). As supply of gas from domestic

sources is unlikely to meet incremental demand, dependence on imported R-LNG will

increase. R-LNG is nearly 1.5 times costlier than domestic fuel. The extent to which the gas

deficit is met through imports will determine the increase in fuel bill.

While a few players in the power generation sector have acquired coal mines in Indonesia and

Australia to secure fuel supply for their planned capacity additions, regulatory risks in the

countries of acquisition are substantial. For instance, to correctly price its coal resources, the

Government of Indonesia has linked coal price to a benchmark based on international coal

prices; the coal price benchmark is an average of monthly prices on four coal indices: the

Indonesian Coal-price Index, the Globalcoal Newcastle Index, the Newcastle Export Index, and

the Platts-1 Index. Accordingly, all contracts entered into by companies for procuring

Indonesian coal either with group companies or external suppliers had to be modified before

September 23, 2011. The increase in coal prices could, in this case, be as high as 2.5 times,

assuming no fluctuations in foreign exchange rate.

Rising coal prices could lead to deferral of projects as a large fuel bill could impact the

fundamental viability of some of the projects and the financial closure of some projects, as

project financiers would perceive higher risks in funding projects with high imported fuel

content.

298322

374398

427431457

493

532 539

0

100

200

300

400

500

600

2006-07 2007-08 2008-09 2009-10 2010-11

Coal Consumption Domestic supply

77101

133

166

200

0

50

100

150

200

250

2010-11 2011-12P 2012-13P 2013-14P 2014-15P

39 40

60

72

3335

5965

0

10

20

30

40

50

60

70

80

2007-08 2008-09 2009-10 2010-11

Demand (mmscmd) Domestic supply (mmscmd)

7

19

45

66

80

0

10

20

30

40

50

60

70

80

90

2010-11 2011-12P 2012-13P 2013-14P 2014-15P

Deficit (mmscmd)

9%

6%

Chart 3: Coal demand by power sector (mt) Chart 4: Projected coal deficit (mt)Chart 5: Demand, supply of gas for power sector Chart 6: Projected gas deficit

Power Sector Lenders: Will the credit quality trip?

Page 39: Crisil oct11

33

Risks related to fuel and project execution will increase power generation costs

environmental and forest clearances and in land acquisition, and local law and order

problems.

Owing to the moderate growth in supply, no new FSA has been signed after March 2009.

CRISIL estimates that the annual demand for coal from the power sector will increase to as

much as 750 million tonnes by 2014-15 depending on pace of capacity additions.

In the absence of similar growth in domestic coal supply, the annual demand-supply gap is

expected to increase to over 200 million tonnes by 2014-15, taking the proportion of

imported coal in coal mix to 26 per cent from around 12 per cent currently.

Consequently, it is likely that CIL will commit to provide domestic fuel only to the extent of 50

per cent of the annual contracted quantity for plants commissioned in the Twelfth Five Year

Plan. CRISIL believes that more than 80 per cent of the projects commissioned from 2011-12 2will have a fuel linkage only in the form of Memorandum of Understanding or tapering

linkage. These projects will, therefore, have to increasingly rely on higher coal imports to meet

fuel needs; imported fuel is nearly 2.5 times to 3 times costlier (on a landed cost basis) than

domestic coal on a calorie-adjusted basis, thus increasing the fuel bill.

Gas-based plants are also vulnerable to decline in production from the Krishna Godavari (KG)

basin. Decline in production from the KG basin increased the gas demand-supply gap for the

2 Memorandum of Understanding has to be renewed every year, thereby posing risks on account of potential delays in renewal, as

against FSAs which are relatively long-term agreements, ranging between 20 to 25 years.

power sector to 7 mmscmd in 2010-11 from 1 mmscmd in 2009-10. This gap has been filled by

costlier imported regassified liquefied natural gas (R-LNG). As supply of gas from domestic

sources is unlikely to meet incremental demand, dependence on imported R-LNG will

increase. R-LNG is nearly 1.5 times costlier than domestic fuel. The extent to which the gas

deficit is met through imports will determine the increase in fuel bill.

While a few players in the power generation sector have acquired coal mines in Indonesia and

Australia to secure fuel supply for their planned capacity additions, regulatory risks in the

countries of acquisition are substantial. For instance, to correctly price its coal resources, the

Government of Indonesia has linked coal price to a benchmark based on international coal

prices; the coal price benchmark is an average of monthly prices on four coal indices: the

Indonesian Coal-price Index, the Globalcoal Newcastle Index, the Newcastle Export Index, and

the Platts-1 Index. Accordingly, all contracts entered into by companies for procuring

Indonesian coal either with group companies or external suppliers had to be modified before

September 23, 2011. The increase in coal prices could, in this case, be as high as 2.5 times,

assuming no fluctuations in foreign exchange rate.

Rising coal prices could lead to deferral of projects as a large fuel bill could impact the

fundamental viability of some of the projects and the financial closure of some projects, as

project financiers would perceive higher risks in funding projects with high imported fuel

content.

298322

374398

427431457

493

532 539

0

100

200

300

400

500

600

2006-07 2007-08 2008-09 2009-10 2010-11

Coal Consumption Domestic supply

77101

133

166

200

0

50

100

150

200

250

2010-11 2011-12P 2012-13P 2013-14P 2014-15P

39 40

60

72

3335

5965

0

10

20

30

40

50

60

70

80

2007-08 2008-09 2009-10 2010-11

Demand (mmscmd) Domestic supply (mmscmd)

7

19

45

66

80

0

10

20

30

40

50

60

70

80

90

2010-11 2011-12P 2012-13P 2013-14P 2014-15P

Deficit (mmscmd)

9%

6%

Chart 3: Coal demand by power sector (mt) Chart 4: Projected coal deficit (mt)Chart 5: Demand, supply of gas for power sector Chart 6: Projected gas deficit

Power Sector Lenders: Will the credit quality trip?

Page 40: Crisil oct11

35

Risks related to fuel and project execution will increase power generation costs

Furthermore, logistical limitations, in terms of coal/gas handling capacities at the ports and

rail transport to the hinterland, could become severe bottlenecks if improvement in port and

rail infrastructure in India does not take keep pace with expected increase in fuel imports.

CRISIL believes that significant constraints in domestic availability of fuel will lead to increased

reliance on imported fuel, which is costlier. CRISIL expects fuel-related costs to increase by 14

to 15 per cent annually, as against 6 to 7 per cent over the past few years on account of rising

proportion of imported fuel in the fuel mix and general inflation in fuel prices.

CRISIL believes that the impact of the above-mentioned risks will be threefold.

Nearly 95 per cent of the existing 111-GW thermal capacity enjoys fuel pass-through.

Furthermore, nearly 60 per cent of the thermal capacity additions are estimated to have

complete pass-through of fuel cost increase. Therefore, a large part of the increase in cost of

generation will be borne by the discoms.

CRISIL expects, on average, the weighted average cost of power procurement (power

generated from all sources) for discoms to increase by 10 per cent to 12 per cent annually,

driven largely by the increase in cost of generation for the thermal capacities. The increase will

be driven by fuel as well as rising capital costs.

1. Cost of procurement for discoms will rise by 10 to 12 per cent annually

2. Generation capacities with no/limited fuel price increase pass-through clause to see

negative impact on profitability, leading to deferral of projects

3. Receivables of generation companies will rise because of continued weak financial

health of discoms

Nearly 19 GW of the power generation capacities under implementation have no or limited

ability to pass through fuel cost increases. CRISIL believes that, compared to existing capacities

with near complete reliance on domestic fuel, these projects will have to rely on imported coal

to meet around 50 to 60 per cent of their fuel requirement. These capacities will, therefore,

see larger-than-expected fuel bills on account of an unfavourable fuel mix. As these capacities

have no or partial pass-through clause, their profitability and cash flows will be affected.

Furthermore, these projects may find it difficult to get financing on account of inadequate

cash flows, leading to a deferral in projects.

CRISIL believes that receivable days of power generation entities with higher exposure to

Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh, Madhya Pradesh, Jharkhand,

and Andhra Pradesh could increase as these discoms have weak financial risk profiles. Their

losses account for around 85 per cent of the power sector's losses and around 80 per cent of

the debt of the power distribution sector is concentrated in discoms of these states.

167111

193

34

0

20

40

60

80

100

120

140

160

180

2010-11 Part/no pass through Merchant Pass through 2014-15

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY10E FY11E FY12P FY13P

95% capacity has full pass through

80 to 85% capacity to have full pass

through

Chart 7: Large part of capacity additions to still enjoy pass-through of fuel costs

Chart 8: Average cost of procurement (Rs/kwh)

Power Sector Lenders: Will the credit quality trip?

Page 41: Crisil oct11

35

Risks related to fuel and project execution will increase power generation costs

Furthermore, logistical limitations, in terms of coal/gas handling capacities at the ports and

rail transport to the hinterland, could become severe bottlenecks if improvement in port and

rail infrastructure in India does not take keep pace with expected increase in fuel imports.

CRISIL believes that significant constraints in domestic availability of fuel will lead to increased

reliance on imported fuel, which is costlier. CRISIL expects fuel-related costs to increase by 14

to 15 per cent annually, as against 6 to 7 per cent over the past few years on account of rising

proportion of imported fuel in the fuel mix and general inflation in fuel prices.

CRISIL believes that the impact of the above-mentioned risks will be threefold.

Nearly 95 per cent of the existing 111-GW thermal capacity enjoys fuel pass-through.

Furthermore, nearly 60 per cent of the thermal capacity additions are estimated to have

complete pass-through of fuel cost increase. Therefore, a large part of the increase in cost of

generation will be borne by the discoms.

CRISIL expects, on average, the weighted average cost of power procurement (power

generated from all sources) for discoms to increase by 10 per cent to 12 per cent annually,

driven largely by the increase in cost of generation for the thermal capacities. The increase will

be driven by fuel as well as rising capital costs.

1. Cost of procurement for discoms will rise by 10 to 12 per cent annually

2. Generation capacities with no/limited fuel price increase pass-through clause to see

negative impact on profitability, leading to deferral of projects

3. Receivables of generation companies will rise because of continued weak financial

health of discoms

Nearly 19 GW of the power generation capacities under implementation have no or limited

ability to pass through fuel cost increases. CRISIL believes that, compared to existing capacities

with near complete reliance on domestic fuel, these projects will have to rely on imported coal

to meet around 50 to 60 per cent of their fuel requirement. These capacities will, therefore,

see larger-than-expected fuel bills on account of an unfavourable fuel mix. As these capacities

have no or partial pass-through clause, their profitability and cash flows will be affected.

Furthermore, these projects may find it difficult to get financing on account of inadequate

cash flows, leading to a deferral in projects.

CRISIL believes that receivable days of power generation entities with higher exposure to

Tamil Nadu, Rajasthan, Punjab, Haryana, Bihar, Uttar Pradesh, Madhya Pradesh, Jharkhand,

and Andhra Pradesh could increase as these discoms have weak financial risk profiles. Their

losses account for around 85 per cent of the power sector's losses and around 80 per cent of

the debt of the power distribution sector is concentrated in discoms of these states.

167111

193

34

0

20

40

60

80

100

120

140

160

180

2010-11 Part/no pass through Merchant Pass through 2014-15

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY10E FY11E FY12P FY13P

95% capacity has full pass through

80 to 85% capacity to have full pass

through

Chart 7: Large part of capacity additions to still enjoy pass-through of fuel costs

Chart 8: Average cost of procurement (Rs/kwh)

Power Sector Lenders: Will the credit quality trip?

Page 42: Crisil oct11

CRISIL has existing ratings of 'CRISIL AAA/Stable/CRISIL A1+' on Power Finance Corporation

Limited's (PFC's) debt instruments. In this article, CRISIL answers the questions most

frequently asked by investors regarding the ratings.

CRISIL's ratings on PFC's debt instruments are driven by the corporation's high strategic

importance to GoI; this strategic importance is reflected in PFC's role in implementing GoI

policies, and its importance in financing India's power sector, particularly the state power

utilities (SPUs). Additionally, majority ownership by GoI implies a strong moral obligation on

the government to support PFC in the event of an exigency.

In its policy implementation role, PFC acts as the nodal agency for the following:l Development of Ultra Mega Power Projects (UMPPs) with a minimum capacity of 4000

megawatts (MW) each: Under the UMPP scheme, PFC incorporates wholly owned

subsidiaries as special purpose vehicles (SPVs) for the projects; these SPVs undertake

preliminary studies and obtain necessary linkages, clearances, land, and approvals,

including for water, land and power sale arrangements. Subsequently, the SPVs are

transferred to successful bidders, who then implement these projects, on payment of

development costs incurred by each SPV. Till date, PFC has incorporated a total of 12

wholly owned SPVs for the UMPPs, four of which have been transferred to successful

bidders.l Restructured Accelerated Power Development and Reform Programme (R-APDRP): This

programme aims to reduce transmission and distribution losses of the SPUs. PFC acts as a

single window under the programme, in coordination with the other stakeholders such

as the Ministry of Power (MoP), Steering Committee, Central Electricity Authority (CEA),

National Thermal Power Corporation (NTPC), Power Grid Corporation of India Ltd

(PGCIL), and consultants to achieve speedy and timely completion of projects, and

thereby assist the utilities in achieving loss reduction targets. Cumulative sanctions and

disbursements under R-APDRP till March 31, 2011, were Rs.218.2 billion and Rs.39.0

billion, respectively. l PFC is also the bid process coordinator for the Independent Transmission Projects (ITP)

scheme, which is a tariff-based competitive bidding process for ITPs for the development

of transmission systems through private sector participation. Five SPVs were initially

1. Why is PFC strategically important to the Government of India (GoI)? What is the

extent of support from GoI that has been factored into PFC's ratings?

37

FAQs on Power Finance Corporation Limited

Power Sector Lenders: Will the credit quality trip?

Conclusion

Capacity additions over the next few years will be crucial for reducing India's consistently high

peak power deficits and energy deficits. CRISIL, however, believes that the increase in capital

costs, increased risks in project execution, and higher reliance on imported fuel, will result in

an upward pressure on the cost of power generation for new capacities. This will, in turn,

impact the discoms, raising their power purchase costs, exacerbating their already weak

financial position.

A knowledge sharing endeavour from CRISIL

Insights

Page 43: Crisil oct11

CRISIL has existing ratings of 'CRISIL AAA/Stable/CRISIL A1+' on Power Finance Corporation

Limited's (PFC's) debt instruments. In this article, CRISIL answers the questions most

frequently asked by investors regarding the ratings.

CRISIL's ratings on PFC's debt instruments are driven by the corporation's high strategic

importance to GoI; this strategic importance is reflected in PFC's role in implementing GoI

policies, and its importance in financing India's power sector, particularly the state power

utilities (SPUs). Additionally, majority ownership by GoI implies a strong moral obligation on

the government to support PFC in the event of an exigency.

In its policy implementation role, PFC acts as the nodal agency for the following:l Development of Ultra Mega Power Projects (UMPPs) with a minimum capacity of 4000

megawatts (MW) each: Under the UMPP scheme, PFC incorporates wholly owned

subsidiaries as special purpose vehicles (SPVs) for the projects; these SPVs undertake

preliminary studies and obtain necessary linkages, clearances, land, and approvals,

including for water, land and power sale arrangements. Subsequently, the SPVs are

transferred to successful bidders, who then implement these projects, on payment of

development costs incurred by each SPV. Till date, PFC has incorporated a total of 12

wholly owned SPVs for the UMPPs, four of which have been transferred to successful

bidders.l Restructured Accelerated Power Development and Reform Programme (R-APDRP): This

programme aims to reduce transmission and distribution losses of the SPUs. PFC acts as a

single window under the programme, in coordination with the other stakeholders such

as the Ministry of Power (MoP), Steering Committee, Central Electricity Authority (CEA),

National Thermal Power Corporation (NTPC), Power Grid Corporation of India Ltd

(PGCIL), and consultants to achieve speedy and timely completion of projects, and

thereby assist the utilities in achieving loss reduction targets. Cumulative sanctions and

disbursements under R-APDRP till March 31, 2011, were Rs.218.2 billion and Rs.39.0

billion, respectively. l PFC is also the bid process coordinator for the Independent Transmission Projects (ITP)

scheme, which is a tariff-based competitive bidding process for ITPs for the development

of transmission systems through private sector participation. Five SPVs were initially

1. Why is PFC strategically important to the Government of India (GoI)? What is the

extent of support from GoI that has been factored into PFC's ratings?

37

FAQs on Power Finance Corporation Limited

Power Sector Lenders: Will the credit quality trip?

Conclusion

Capacity additions over the next few years will be crucial for reducing India's consistently high

peak power deficits and energy deficits. CRISIL, however, believes that the increase in capital

costs, increased risks in project execution, and higher reliance on imported fuel, will result in

an upward pressure on the cost of power generation for new capacities. This will, in turn,

impact the discoms, raising their power purchase costs, exacerbating their already weak

financial position.

A knowledge sharing endeavour from CRISIL

Insights

Page 44: Crisil oct11

incorporated under ITPs, of which one has been liquidated, while three have been

transferred to the successful bidders.

PFC also plays a significant role in financing the power sector in India.l PFC is the single largest lender to the power sector, with advances of Rs.996 billion (refer

to Chart 1); it had a share of 21 per cent in the total outstanding advances to the power

sector as on March 31, 2011.

Chart 1: Largest lenders to the power sector

Source: Company data, Annual Reports

l The importance of PFC in channeling financing to the domestic power sector is

underscored by the fact that PFC, together with REC, accounted for about 42 per cent of

the aggregate debt outstanding of SPUs as on March 31, 2010 (the latest period for which

data is available ; refer to Chart 2). In the Indian context, SPUs form the back bone of the

power sector, with more than 40 per cent of the country's generation capacity and 95 per

cent of the distribution network. The share of PFC and REC is estimated to have reduced to

about 40 per cent as on March 31, 2011, as banks have increased their exposure to the

power sector; the share is, however, unlikely to reduce further. Clearly, PFC will remain a

key financier to SPUs, and therefore, play a key role in sustaining their operations.

39

FAQs on Power Finance Corporation Limited

Chart 2: Source of SPUs' borrowings as on March 31, 2010

Source: PFC report "Performance of State Power Utilities for the years 2007-08 to 2009-10"

Additionally, majority ownership, and a strong public perception of sovereign backing implies

a strong moral obligation on GoI to support PFC in the event of distress. Given PFC's strategic

role in implementing GoI's policy, channeling finance to the power sector, especially the SPUs,

and ensuring the sustainability of SPUs, and GoI's majority ownership of PFC, CRISIL believes

that PFC will continue to benefit from substantial support from GoI when necessary.

GoI had a 73.72 per cent stake in PFC as on June 30, 2011. The stake has reduced from 89.78

per cent subsequent to the follow-on public offering (FPO) of shares in May 2011. In line with

its policy for 'Navratna' companies, GoI is, however, expected to retain majority ownership in

PFC.

In the past, GoI has supported PFC through mechanisms such as allowing issue of tax-free

bonds, and asset protection mechanisms such as providing PFC access to Central Plan

Allocation funds for recovering dues from SPUs that have delayed repayments. PFC's board of

directors also has representation from the MoP.

2. Does CRISIL expect GoI to divest its majority shareholding in PFC? What is the

nature of support that GoI has provided, and is expected to provide, to PFC?

996

821

295

282

267

232

171

0 100 200 300 400 500 600 700 800 900 1000

PFC

REC

SBI

Canara Bank

IDFC

IDBI Bank

Central Bank of India

Advances-Power (Rs. Billion)

Power Sector Lenders: Will the credit quality trip?

REC21.1%

Banks/FIs/Bonds58.3%

PFC20.6%

Page 45: Crisil oct11

incorporated under ITPs, of which one has been liquidated, while three have been

transferred to the successful bidders.

PFC also plays a significant role in financing the power sector in India.l PFC is the single largest lender to the power sector, with advances of Rs.996 billion (refer

to Chart 1); it had a share of 21 per cent in the total outstanding advances to the power

sector as on March 31, 2011.

Chart 1: Largest lenders to the power sector

Source: Company data, Annual Reports

l The importance of PFC in channeling financing to the domestic power sector is

underscored by the fact that PFC, together with REC, accounted for about 42 per cent of

the aggregate debt outstanding of SPUs as on March 31, 2010 (the latest period for which

data is available ; refer to Chart 2). In the Indian context, SPUs form the back bone of the

power sector, with more than 40 per cent of the country's generation capacity and 95 per

cent of the distribution network. The share of PFC and REC is estimated to have reduced to

about 40 per cent as on March 31, 2011, as banks have increased their exposure to the

power sector; the share is, however, unlikely to reduce further. Clearly, PFC will remain a

key financier to SPUs, and therefore, play a key role in sustaining their operations.

39

FAQs on Power Finance Corporation Limited

Chart 2: Source of SPUs' borrowings as on March 31, 2010

Source: PFC report "Performance of State Power Utilities for the years 2007-08 to 2009-10"

Additionally, majority ownership, and a strong public perception of sovereign backing implies

a strong moral obligation on GoI to support PFC in the event of distress. Given PFC's strategic

role in implementing GoI's policy, channeling finance to the power sector, especially the SPUs,

and ensuring the sustainability of SPUs, and GoI's majority ownership of PFC, CRISIL believes

that PFC will continue to benefit from substantial support from GoI when necessary.

GoI had a 73.72 per cent stake in PFC as on June 30, 2011. The stake has reduced from 89.78

per cent subsequent to the follow-on public offering (FPO) of shares in May 2011. In line with

its policy for 'Navratna' companies, GoI is, however, expected to retain majority ownership in

PFC.

In the past, GoI has supported PFC through mechanisms such as allowing issue of tax-free

bonds, and asset protection mechanisms such as providing PFC access to Central Plan

Allocation funds for recovering dues from SPUs that have delayed repayments. PFC's board of

directors also has representation from the MoP.

2. Does CRISIL expect GoI to divest its majority shareholding in PFC? What is the

nature of support that GoI has provided, and is expected to provide, to PFC?

996

821

295

282

267

232

171

0 100 200 300 400 500 600 700 800 900 1000

PFC

REC

SBI

Canara Bank

IDFC

IDBI Bank

Central Bank of India

Advances-Power (Rs. Billion)

Power Sector Lenders: Will the credit quality trip?

REC21.1%

Banks/FIs/Bonds58.3%

PFC20.6%

Page 46: Crisil oct11

41

FAQs on Power Finance Corporation Limited

In recent times, GoI has stepped up its direct support to sectors that are considered critical for

economic growth and stability. For instance, in the aftermath of the financial crisis in 2008-09

(refers to financial year, April 1 to March 31), GoI has expanded its support for public sector

banks (PSBs) by infusing aggregate fresh equity capital of Rs.232 billion over the past three

years, and increasing its stake in PSBs to 58 per cent. It has also publicly committed to ensure

that the PSBs maintain capital adequacy of 12 per cent on a steady state basis.

CRISIL, therefore, believes that despite decline in its ownership, GoI will continue to provide

policy support and an enabling environment to PFC, given the criticality of power for

sustaining India's economic development and PFC's importance as a financier of SPUs. The

support may include measures such as asset protection mechanisms and funding support,

including special status to raise low-cost resources as and when required.

As Chart 1 indicates, PFC has a leadership position in providing finance to the domestic power

sector. As per CRISIL estimates, exposure to power sector constitutes bulk (around 60 per

cent) of the aggregate exposure to infrastructure sector of approximately Rs.8 trillion. PFC is

the largest provider of finance to the power sector, with a market share of around 21 per cent

as on March 31, 2011.

Over the past few years, competition for funding the power sector has increased

substantially; this is reflected in strong growth in the banking industry's advances to the

sector, especially in 2009-10 and 2010-11, when growth rates were at 51 per cent and 43 per

cent, respectively-far higher than the overall credit growth. PFC's share has moderated in this

period (refer to Chart 3).

3. What is PFC's competitive position in the infrastructure financing space? How is PFC

expected to maintain this position, in light of current challenges faced by the power sector?

Chart 3: Trends in share of banks and power financiers

Source: Company data, RBI data

However, the average tenor of the banks' liabilities is estimated to be 2.5 years, while

infrastructure exposures are typically of a substantially longer tenor. Given the inherent

mismatch, banks will face challenges in taking substantial incremental infrastructure

exposures. Additionally, the share of the power sector in the total infrastructure advances and

in the total advances of banks has increased (refer to Chart 4) .

Chart 4: Share of power sector in total banking non-food credit

Source: RBI data

49 53 56

25 23 21

20 19 17

6 6 7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011

As on March 31

Banks PFC REC Other IFCs

4.8

6.2

7.3

0%

2%

4%

6%

8%

10%

2009 2010

As on March 31

Share of power sector

2011

Power Sector Lenders: Will the credit quality trip?

Page 47: Crisil oct11

41

FAQs on Power Finance Corporation Limited

In recent times, GoI has stepped up its direct support to sectors that are considered critical for

economic growth and stability. For instance, in the aftermath of the financial crisis in 2008-09

(refers to financial year, April 1 to March 31), GoI has expanded its support for public sector

banks (PSBs) by infusing aggregate fresh equity capital of Rs.232 billion over the past three

years, and increasing its stake in PSBs to 58 per cent. It has also publicly committed to ensure

that the PSBs maintain capital adequacy of 12 per cent on a steady state basis.

CRISIL, therefore, believes that despite decline in its ownership, GoI will continue to provide

policy support and an enabling environment to PFC, given the criticality of power for

sustaining India's economic development and PFC's importance as a financier of SPUs. The

support may include measures such as asset protection mechanisms and funding support,

including special status to raise low-cost resources as and when required.

As Chart 1 indicates, PFC has a leadership position in providing finance to the domestic power

sector. As per CRISIL estimates, exposure to power sector constitutes bulk (around 60 per

cent) of the aggregate exposure to infrastructure sector of approximately Rs.8 trillion. PFC is

the largest provider of finance to the power sector, with a market share of around 21 per cent

as on March 31, 2011.

Over the past few years, competition for funding the power sector has increased

substantially; this is reflected in strong growth in the banking industry's advances to the

sector, especially in 2009-10 and 2010-11, when growth rates were at 51 per cent and 43 per

cent, respectively-far higher than the overall credit growth. PFC's share has moderated in this

period (refer to Chart 3).

3. What is PFC's competitive position in the infrastructure financing space? How is PFC

expected to maintain this position, in light of current challenges faced by the power sector?

Chart 3: Trends in share of banks and power financiers

Source: Company data, RBI data

However, the average tenor of the banks' liabilities is estimated to be 2.5 years, while

infrastructure exposures are typically of a substantially longer tenor. Given the inherent

mismatch, banks will face challenges in taking substantial incremental infrastructure

exposures. Additionally, the share of the power sector in the total infrastructure advances and

in the total advances of banks has increased (refer to Chart 4) .

Chart 4: Share of power sector in total banking non-food credit

Source: RBI data

49 53 56

25 23 21

20 19 17

6 6 7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011

As on March 31

Banks PFC REC Other IFCs

4.8

6.2

7.3

0%

2%

4%

6%

8%

10%

2009 2010

As on March 31

Share of power sector

2011

Power Sector Lenders: Will the credit quality trip?

Page 48: Crisil oct11

43

FAQs on Power Finance Corporation Limited

PFC also has a strong pipeline of undisbursed sanctions. Given the large volume of financing

required in the power sector and the fact that banks typically do not focus on a single sector,

CRISIL believes that PFC will maintain its strong competitive position in this space. This is

reflected in the fact that PFC's loan portfolio is more than three times the size of the power

portfolio of India's largest bank. Also, banks are focused on specific tenors (of less than 5

years) and segments (mostly, private generation projects). This enhances PFC's role as one of

the main providers of finance to the power sector, particularly SPUs.

PFC faces asset quality challenges on account of three main factors:l Weak financials of the largest borrower segment, the SPUs l Sectoral concentration l Key account concentration, which may lead to chunky non-performing assets (NPAs); the

top 10 borrowers accounted for 55 per cent of PFC's total loans as on March 31, 2011.

The first of these is the most critical, while the second will continue to exist given the

mandate. However, PFC’s direct exposure to state power utilities has reduced over time to 65

per cent as on March 31, 2011, from 72 per cent as on March 31, 2009. Additionally, almost 20

per cent of PFC's advances are to the central power utilities, which are usually highly rated

entities.

The company has been able to mitigate its asset quality risks and maintain strong collection

efficiency (more than 98 per cent on average over the past five years) and low gross NPAs (0.23

per cent as on March 31, 2011) owing to the incentive structure built into the recovery

process, its criticality to borrowers and the various asset protection mechanisms in place.

l PFC incentivises SPUs to make timely repayments by providing rebate of 0.25 per cent on

interest payable; this rebate is available only if the borrower services all its debt on time.l PFC halts any further disbursement on a facility if there is delay by the borrower in

payment on another facility. SPUs, therefore, delay payments to PFC only as a last resort,

because lack of access to PFC funding will substantially curb their operations and lead to

increase in interest payment on the entire debt availed of from PFC. Overdues to PFC

from the private sector are significantly higher than those from the state sector.

4. Given PFC's significant exposure to SPUs and the high sectoral and customer

concentration, how does it manage the asset quality risks in its portfolio?

l Additionally, PFC has also set in place several asset protection mechanisms for

state/central sector and private borrowers. m Advances to the central and state sector are generally secured either through a

charge on project assets, or by a state government guarantee, or both. In addition, as

on March 31, 2011, 80.5 per cent of outstanding loans to the state and central power

sector involved an escrow mechanism. However, state government guarantees will

not be extended henceforth, and the proportion of loans covered by such a guarantee

may, therefore, reduce over time. Currently the proportion of loans having state

government guarantees is 14.9 per cent. Nevertheless, use of fallback mechanisms

such as an escrow account has been minimal.m Advances to the private sector are secured through, among other things, a first

priority pari passu charge on the relevant project assets, collaterals such as pledges of

shares held by promoters, and personal/corporate guarantees and trust and

retention arrangements. l PFC also modifies its loan policies periodically to address heightened risks in its exposure.

For instance, in the case of all projects:m Fuel supply agreements (FSAs) have to be in place at the time of disbursement.

Earlier, PFC allowed 12 months time, post first disbursement to have an FSA in place.m A power purchase agreement (PPA) needs to be in place upfront, as opposed to

within one year earlier.

PFC has maintained a good collection performance till date. CRISIL, however, believes that

asset quality pressures may intensify in future if deterioration in the performance of SPUs is

not arrested. Additionally, given the high concentration risk, financial stress on any of these

borrowers could lead to significant increase in NPA levels for PFC. While CRISIL does not

expect significant impairment in PFC's lending portfolio in the near term, its underwriting and

credit monitoring mechanisms, and the financial health of SPUs will be key monitorables over

the medium term.

CRISIL has analysed PFC's state-wise SPU exposures (refer to Annexure I for details) and

classified these exposures based on risk levels. The risk levels were identified based on the

performance of the distribution companies, and applied to the total exposure to the state on

account of linkages among generation, transmission and distribution companies.

5. PFC has reported low gross NPAs. How does CRISIL analyse inherent risks in PFC's

portfolio?

Power Sector Lenders: Will the credit quality trip?

Page 49: Crisil oct11

43

FAQs on Power Finance Corporation Limited

PFC also has a strong pipeline of undisbursed sanctions. Given the large volume of financing

required in the power sector and the fact that banks typically do not focus on a single sector,

CRISIL believes that PFC will maintain its strong competitive position in this space. This is

reflected in the fact that PFC's loan portfolio is more than three times the size of the power

portfolio of India's largest bank. Also, banks are focused on specific tenors (of less than 5

years) and segments (mostly, private generation projects). This enhances PFC's role as one of

the main providers of finance to the power sector, particularly SPUs.

PFC faces asset quality challenges on account of three main factors:l Weak financials of the largest borrower segment, the SPUs l Sectoral concentration l Key account concentration, which may lead to chunky non-performing assets (NPAs); the

top 10 borrowers accounted for 55 per cent of PFC's total loans as on March 31, 2011.

The first of these is the most critical, while the second will continue to exist given the

mandate. However, PFC’s direct exposure to state power utilities has reduced over time to 65

per cent as on March 31, 2011, from 72 per cent as on March 31, 2009. Additionally, almost 20

per cent of PFC's advances are to the central power utilities, which are usually highly rated

entities.

The company has been able to mitigate its asset quality risks and maintain strong collection

efficiency (more than 98 per cent on average over the past five years) and low gross NPAs (0.23

per cent as on March 31, 2011) owing to the incentive structure built into the recovery

process, its criticality to borrowers and the various asset protection mechanisms in place.

l PFC incentivises SPUs to make timely repayments by providing rebate of 0.25 per cent on

interest payable; this rebate is available only if the borrower services all its debt on time.l PFC halts any further disbursement on a facility if there is delay by the borrower in

payment on another facility. SPUs, therefore, delay payments to PFC only as a last resort,

because lack of access to PFC funding will substantially curb their operations and lead to

increase in interest payment on the entire debt availed of from PFC. Overdues to PFC

from the private sector are significantly higher than those from the state sector.

4. Given PFC's significant exposure to SPUs and the high sectoral and customer

concentration, how does it manage the asset quality risks in its portfolio?

l Additionally, PFC has also set in place several asset protection mechanisms for

state/central sector and private borrowers. m Advances to the central and state sector are generally secured either through a

charge on project assets, or by a state government guarantee, or both. In addition, as

on March 31, 2011, 80.5 per cent of outstanding loans to the state and central power

sector involved an escrow mechanism. However, state government guarantees will

not be extended henceforth, and the proportion of loans covered by such a guarantee

may, therefore, reduce over time. Currently the proportion of loans having state

government guarantees is 14.9 per cent. Nevertheless, use of fallback mechanisms

such as an escrow account has been minimal.m Advances to the private sector are secured through, among other things, a first

priority pari passu charge on the relevant project assets, collaterals such as pledges of

shares held by promoters, and personal/corporate guarantees and trust and

retention arrangements. l PFC also modifies its loan policies periodically to address heightened risks in its exposure.

For instance, in the case of all projects:m Fuel supply agreements (FSAs) have to be in place at the time of disbursement.

Earlier, PFC allowed 12 months time, post first disbursement to have an FSA in place.m A power purchase agreement (PPA) needs to be in place upfront, as opposed to

within one year earlier.

PFC has maintained a good collection performance till date. CRISIL, however, believes that

asset quality pressures may intensify in future if deterioration in the performance of SPUs is

not arrested. Additionally, given the high concentration risk, financial stress on any of these

borrowers could lead to significant increase in NPA levels for PFC. While CRISIL does not

expect significant impairment in PFC's lending portfolio in the near term, its underwriting and

credit monitoring mechanisms, and the financial health of SPUs will be key monitorables over

the medium term.

CRISIL has analysed PFC's state-wise SPU exposures (refer to Annexure I for details) and

classified these exposures based on risk levels. The risk levels were identified based on the

performance of the distribution companies, and applied to the total exposure to the state on

account of linkages among generation, transmission and distribution companies.

5. PFC has reported low gross NPAs. How does CRISIL analyse inherent risks in PFC's

portfolio?

Power Sector Lenders: Will the credit quality trip?

Page 50: Crisil oct11

CRISIL has, thus, classified PFC's SPU exposures as follows:

Table 1: Risk classification of PFCs SPU exposures

CRISIL analyses potential slippages from the highest and high risk portfolios and the private

sector exposure to estimate the adequacy of capital to cover these asset-side risks and the

impact on earnings should the risks materialise.

PFC's NPA recognition norms differ from those of banks in two aspects:l PFC recognises NPAs at 180 days-past-due (dpd), while the banks do so at 90-dpd. l For loans to SPUs, PFC recognises NPAs facility-wise-in other words, only those facilities

that are 180 dpd are classified as NPAs; banks on the other hand classify all facilities of the

borrower as NPAs if any one facility has breached the 90-dpd mark.

For PFC’s exposures to the private sector, while NPAs are recognized at 180-dpd, any

individual facility turning into a NPA will lead to the entire exposure to that specific entity

being classified as NPA.

Table 2 presents PFC's bucket-wise delinquencies. To estimate PFC's gross NPA levels as

consistent with banking norms, CRISIL has considered PFC's total exposure to borrowers with

overdues of 90 days and more.

Table 2: Bucket-wise delinquencies as on March 31, 2011

* Taking into account all outstanding facilities of the borrower

6. How will PFC's gross NPA levels be affected if banks' NPA recognition norms were

applied to PFC?

Exposure (Rs. Bn.) Share in total SPU exposure

Highest Risk 229.6 35.6%

High Risk 205.3 31.8%

Moderate Risk 169.5 26.3%

Low Risk 40.8 6.3%

Total SPU exposure 645.1 100.0%

45

FAQs on Power Finance Corporation Limited

Given the politically sensitive nature of electricity and the fact that SPUs operate as an arm of

the respective state governments, CRISIL believes that the state governments will continue to

support the SPUs in making payments to PFC. PFC has a substantial exposure to high-risk

SPUs. Nevertheless, the ability of state governments to support SPUs mitigates asset quality

risks on these exposures. CRISIL has therefore, mapped these exposures against state

finances to arrive at a risk matrix that identifies the ultimate risk in PFC's loan book (refer to

CRISIL article ‘Credit quality of power sector lenders- potential risks ahead’ for

methodology).

Chart 5: Risk matrix of SPU exposures

Overdue Overdue Amount (Rs.Million.) Total Exposure to borrower* (Rs.Million.)

0-30 43

30-90 637

>90 382 9962

Total overdues 1062 9962

Total advances 995707 995707

Adjusted NPA 1.0%

Power Sector Lenders: Will the credit quality trip?

Cluster IV(Lowest)

Himachal PradeshWest Bengal

BiharJammu & KashmirNorth Eastern States (excluding Assam)

Cluster IIIKerala

Uttarakhand

JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh

AssamOrissa

Cluster IIGoa

GujaratChhattisgarhMaharashtra

Andhra PradeshHaryanaTamil Nadu

Cluster I (Highest)

Delhi Karnataka

Low Risk Moderate Risk High Risk

Risk profile of State Power Utilities

Stat

e G

ove

rnm

ent

abili

ty t

o s

up

po

rt

Highest Risk Moderate RiskHigh Risk Low Risk

Page 51: Crisil oct11

CRISIL has, thus, classified PFC's SPU exposures as follows:

Table 1: Risk classification of PFCs SPU exposures

CRISIL analyses potential slippages from the highest and high risk portfolios and the private

sector exposure to estimate the adequacy of capital to cover these asset-side risks and the

impact on earnings should the risks materialise.

PFC's NPA recognition norms differ from those of banks in two aspects:l PFC recognises NPAs at 180 days-past-due (dpd), while the banks do so at 90-dpd. l For loans to SPUs, PFC recognises NPAs facility-wise-in other words, only those facilities

that are 180 dpd are classified as NPAs; banks on the other hand classify all facilities of the

borrower as NPAs if any one facility has breached the 90-dpd mark.

For PFC’s exposures to the private sector, while NPAs are recognized at 180-dpd, any

individual facility turning into a NPA will lead to the entire exposure to that specific entity

being classified as NPA.

Table 2 presents PFC's bucket-wise delinquencies. To estimate PFC's gross NPA levels as

consistent with banking norms, CRISIL has considered PFC's total exposure to borrowers with

overdues of 90 days and more.

Table 2: Bucket-wise delinquencies as on March 31, 2011

* Taking into account all outstanding facilities of the borrower

6. How will PFC's gross NPA levels be affected if banks' NPA recognition norms were

applied to PFC?

Exposure (Rs. Bn.) Share in total SPU exposure

Highest Risk 229.6 35.6%

High Risk 205.3 31.8%

Moderate Risk 169.5 26.3%

Low Risk 40.8 6.3%

Total SPU exposure 645.1 100.0%

45

FAQs on Power Finance Corporation Limited

Given the politically sensitive nature of electricity and the fact that SPUs operate as an arm of

the respective state governments, CRISIL believes that the state governments will continue to

support the SPUs in making payments to PFC. PFC has a substantial exposure to high-risk

SPUs. Nevertheless, the ability of state governments to support SPUs mitigates asset quality

risks on these exposures. CRISIL has therefore, mapped these exposures against state

finances to arrive at a risk matrix that identifies the ultimate risk in PFC's loan book (refer to

CRISIL article ‘Credit quality of power sector lenders- potential risks ahead’ for

methodology).

Chart 5: Risk matrix of SPU exposures

Overdue Overdue Amount (Rs.Million.) Total Exposure to borrower* (Rs.Million.)

0-30 43

30-90 637

>90 382 9962

Total overdues 1062 9962

Total advances 995707 995707

Adjusted NPA 1.0%

Power Sector Lenders: Will the credit quality trip?

Cluster IV(Lowest)

Himachal PradeshWest Bengal

BiharJammu & KashmirNorth Eastern States (excluding Assam)

Cluster IIIKerala

Uttarakhand

JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh

AssamOrissa

Cluster IIGoa

GujaratChhattisgarhMaharashtra

Andhra PradeshHaryanaTamil Nadu

Cluster I (Highest)

Delhi Karnataka

Low Risk Moderate Risk High Risk

Risk profile of State Power Utilities

Stat

e G

ove

rnm

ent

abili

ty t

o s

up

po

rt

Highest Risk Moderate RiskHigh Risk Low Risk

Page 52: Crisil oct11

Based on the above table, even if the NPA recognition norms of banks were applied

completely to PFC, CRISIL estimates that the gross NPA levels of PFC would stand at around 1.0

per cent (against the banking industry average of 2.3 per cent).

While PFC's resource profile is wholesale in nature, this does not add significant risks to its

business profile as PFC is able to manage this well. PFC's instruments have wide market

acceptability, as reflected in their diversified investor base with a long-term investment

horizon, including Life Insurance Corporation of India (LIC), pension funds, and gratuity funds.

Other investors include mutual funds and banks. This allows PFC to borrow at low spreads

over G-Secs.

As can be seen in Chart 6, domestic bonds constitute 65.6 per cent of PFC’s total borrowings as

on March 31, 2011, and are usually subscribed to by LIC, Employees Provident Fund

Organisation (EPFO), and gratuity funds, which invest in longer tenor bonds. On the other

hand, loans from banks and financial institutions (FIs) constitute only 28.6 per cent of the total

borrowings. Therefore, the dependence on banks, which are also lenders to the power sector,

is low.

Chart 6: Borrowing profile as on March 31, 2011

7. Does the wholesale resource profile of PFC add any risks to its business profile?

How does PFC manage its asset-liability management (ALM) profile?

47

FAQs on Power Finance Corporation Limited

Having obtained the status of an Infrastructure Finance Company (IFC) from the Reserve Bank

of India (RBI), PFC's resource profile is also expected to benefit from the flexibility to raise

external borrowings. PFC can now raise external commercial borrowings (ECBs) up to 50 per

cent of its net worth, subject to a limit of USD500 million per year under the automatic route

as compared to the approval route earlier. PFC can also issue retail infrastructure bonds,

which will lend some stability to its funding requirements. In 2010-11, PFC raised ECBs of

USD500 million, resulting in the share of foreign currency loans increasing to around 6.0 per

cent as on March 31, 2011 from 4.0 per cent a year ago. PFC hedges only a limited portion of its

foreign exchange (forex) exposure. PFC has in place a board-approved corporate risk

management policy which lays out maximum limits for open forex positions. While PFC

regularly monitors such positions, any adverse movements in exchange or interest rates may

constrain the corporation's earnings, especially if the proportion of unhedged foreign

currency borrowings remains high.

Additionally, upon being classified as an NBFC-IFC, banks' exposure limit to PFC has increased

by 5 per cent of their capital funds. The risk weight for PFC as an NBFC-IFC is significantly

lower; this is expected to translate into lower cost of funds through bank borrowings.

PFC's resource profile is likely to remain wholesale in nature as it needs to raise long-term

funds to ensure adequate matching of its assets and liabilities; this is primarily driven by the

long tenure of its advances. Most retail funds have a shorter maturity.

PFC's ALM profile is well-matched, with average maturity of assets of 6.35 years and average

maturity of liabilities of 5.18 years as on March 31, 2011. It has a low reliance on short-term

borrowings (7.3 per cent of total borrowings as on March 31, 2011). As on March 31, 2011, the

negative mismatches-at 10 per cent of total outflows in the one-year bucket-are manageable.

PFC regularly monitors negative mismatches in its ALM profile, and shifts maturity of funds

being raised depending on negative gaps. The ALM framework includes monthly analysis of

the long-term liquidity of asset receipts and debt obligations. The time, volume and maturity

of borrowings, creation of new assets, and mix of assets and liabilities in terms of maturity

(short-, medium- or long-term) is decided based on the liquidity analysis.

Short Term Loans 7.3%

Bonds65.6%

Rupee Term Loans21.3%

Foreign Currency Loans 5.8%

Power Sector Lenders: Will the credit quality trip?

Page 53: Crisil oct11

Based on the above table, even if the NPA recognition norms of banks were applied

completely to PFC, CRISIL estimates that the gross NPA levels of PFC would stand at around 1.0

per cent (against the banking industry average of 2.3 per cent).

While PFC's resource profile is wholesale in nature, this does not add significant risks to its

business profile as PFC is able to manage this well. PFC's instruments have wide market

acceptability, as reflected in their diversified investor base with a long-term investment

horizon, including Life Insurance Corporation of India (LIC), pension funds, and gratuity funds.

Other investors include mutual funds and banks. This allows PFC to borrow at low spreads

over G-Secs.

As can be seen in Chart 6, domestic bonds constitute 65.6 per cent of PFC’s total borrowings as

on March 31, 2011, and are usually subscribed to by LIC, Employees Provident Fund

Organisation (EPFO), and gratuity funds, which invest in longer tenor bonds. On the other

hand, loans from banks and financial institutions (FIs) constitute only 28.6 per cent of the total

borrowings. Therefore, the dependence on banks, which are also lenders to the power sector,

is low.

Chart 6: Borrowing profile as on March 31, 2011

7. Does the wholesale resource profile of PFC add any risks to its business profile?

How does PFC manage its asset-liability management (ALM) profile?

47

FAQs on Power Finance Corporation Limited

Having obtained the status of an Infrastructure Finance Company (IFC) from the Reserve Bank

of India (RBI), PFC's resource profile is also expected to benefit from the flexibility to raise

external borrowings. PFC can now raise external commercial borrowings (ECBs) up to 50 per

cent of its net worth, subject to a limit of USD500 million per year under the automatic route

as compared to the approval route earlier. PFC can also issue retail infrastructure bonds,

which will lend some stability to its funding requirements. In 2010-11, PFC raised ECBs of

USD500 million, resulting in the share of foreign currency loans increasing to around 6.0 per

cent as on March 31, 2011 from 4.0 per cent a year ago. PFC hedges only a limited portion of its

foreign exchange (forex) exposure. PFC has in place a board-approved corporate risk

management policy which lays out maximum limits for open forex positions. While PFC

regularly monitors such positions, any adverse movements in exchange or interest rates may

constrain the corporation's earnings, especially if the proportion of unhedged foreign

currency borrowings remains high.

Additionally, upon being classified as an NBFC-IFC, banks' exposure limit to PFC has increased

by 5 per cent of their capital funds. The risk weight for PFC as an NBFC-IFC is significantly

lower; this is expected to translate into lower cost of funds through bank borrowings.

PFC's resource profile is likely to remain wholesale in nature as it needs to raise long-term

funds to ensure adequate matching of its assets and liabilities; this is primarily driven by the

long tenure of its advances. Most retail funds have a shorter maturity.

PFC's ALM profile is well-matched, with average maturity of assets of 6.35 years and average

maturity of liabilities of 5.18 years as on March 31, 2011. It has a low reliance on short-term

borrowings (7.3 per cent of total borrowings as on March 31, 2011). As on March 31, 2011, the

negative mismatches-at 10 per cent of total outflows in the one-year bucket-are manageable.

PFC regularly monitors negative mismatches in its ALM profile, and shifts maturity of funds

being raised depending on negative gaps. The ALM framework includes monthly analysis of

the long-term liquidity of asset receipts and debt obligations. The time, volume and maturity

of borrowings, creation of new assets, and mix of assets and liabilities in terms of maturity

(short-, medium- or long-term) is decided based on the liquidity analysis.

Short Term Loans 7.3%

Bonds65.6%

Rupee Term Loans21.3%

Foreign Currency Loans 5.8%

Power Sector Lenders: Will the credit quality trip?

Page 54: Crisil oct11

Base Case Stress CaseExposure at Risk -Highest Risk Rs. Bn. 23.0 68.9 -High Risk Rs. Bn. 10.3 20.5 -Private Sector Rs. Bn. 3.4 6.8Total Exposure at Risk Rs. Bn. 36.6 96.2Exposure at Risk Per cent 3.7 9.7Networth- Mar 31, 2011 Rs. Bn. 151.8 151.8Networth/ Exposure at Risk Times 4.1 1.6Networth- June 30, 2011 Rs. Bn. 192.8 192.8Networth/ Exposure at Risk Times 5.3 2.0

49

FAQs on Power Finance Corporation Limited

8. How does PFC's regulatory dispensation differ from those of other financiers?

9. Will the capital position of PFC be adequate to absorb shocks to its asset quality?

Since PFC is notified as a public financial institution, it is currently exempted from compliance

with most of the prudential norms applicable to NBFCs. However, upon being classified as an

NBFC-IFC, PFC's regulatory framework is gradually converging with those applicable to other

NBFC-IFCs. PFC also has its own internal guidelines, many of which already comply with the

regulatory norms applicable to NBFCs, although not entirely (refer to Annexure II for details).

PFC's regulatory dispensation differs from that of other financiers in the following aspects:l PFC's exposure norms with respect to lending to SPUs are higher than those applicable to

NBFC-IFCs and banks; this allows PFC to retain its sector focus.l PFC's NPA recognition norms are less stringent than those of banks and NBFC-IFCs,

resulting in lower reported gross NPAs.l Standard asset provisioning is not applicable for PFC

PFC is formulating a roadmap (in consultation with the MoP) for submission to RBI by March

31, 2012, setting out the manner in which it intends to comply with RBI prudential norms.

Additionally, RBI, in its various reports, has indicated that it is reexamining the exemptions

granted to government-owned NBFCs. Hence, many of the regulatory concessions currently

available to PFC may be phased out gradually over the medium term. Given PFC's comfortable

capitalisation and earnings profile, CRISIL believes that it will comply with the stringent

regulatory norms applicable to NBFC-IFCs, barring exposure norms.

PFC has comfortable capitalisation; as on March 31, 2011, PFC had a Tier-I capital adequacy

ratio (CAR) of 14.7 per cent, an overall CAR of 15.7 per cent, and a net worth of Rs.152 billion.

PFC has raised around Rs.34.3 billion through its FPO in May 2011. Being classified as NBFC-

IFC, it is required to maintain minimum Tier-I and overall CAR of 10 per cent and 15 per cent,

respectively. Its gearing remains adequate, at around 5.6 times as on March 31, 2011 (5.1

times a year ago). PFC's capitalisation is supported by healthy accruals to net worth as

reflected in the three-year average return on net worth ratio of 18.8 per cent. PFC's accruals

are expected to remain comfortable over the medium term, backed by stable interest

spreads. Given the FPO proceeds and comfortable internal accruals, CRISIL believes that PFC

will maintain adequate capitalisation over the medium term.

Additionally, PFC has flexibility to raise additional equity capital by diluting GoI's shareholding

(currently at 73.72 per cent) to support growth plans over the medium term; PFC can raise

around Rs.74 billion if it dilutes GoI holding to 51 per cent at current market prices.

CRISIL has analysed the adequacy of capital under two scenarios (refer to CRISIL article 'Power

distribution utilities- current issues and what lies ahead’ for details), based on PFC's asset

quality risks, taking into account the risk classification of PFC's SPU exposures (refer to Chart 5)

and the expected stress on its private sector exposures.l In the base case, CRISIL assumed slippages of 10 per cent from the highest risk SPU

portfolio, 5 per cent from the high risk portfolio, and 5 per cent from the private sector

portfolio.l The stress scenario assumed slippages of 30 per cent from the highest risk SPU portfolio,

10 per cent from the high risk portfolio, and 10 per cent from the private sector portfolio.

As can be seen in Table 3, under the base case scenario, PFC is expected to manage the

increased asset quality challenges. Its capital coverage for exposure at risk is expected to be

around 5.3 times. However, under the stress case scenario, its net worth coverage for

exposure at risk is likely to be low, at around 2.0 times, and PFC would require additional

capital to maintain adequate coverage for the increased NPAs.

Table 3: Capital coverage for asset side risks

Power Sector Lenders: Will the credit quality trip?

Page 55: Crisil oct11

Base Case Stress CaseExposure at Risk -Highest Risk Rs. Bn. 23.0 68.9 -High Risk Rs. Bn. 10.3 20.5 -Private Sector Rs. Bn. 3.4 6.8Total Exposure at Risk Rs. Bn. 36.6 96.2Exposure at Risk Per cent 3.7 9.7Networth- Mar 31, 2011 Rs. Bn. 151.8 151.8Networth/ Exposure at Risk Times 4.1 1.6Networth- June 30, 2011 Rs. Bn. 192.8 192.8Networth/ Exposure at Risk Times 5.3 2.0

49

FAQs on Power Finance Corporation Limited

8. How does PFC's regulatory dispensation differ from those of other financiers?

9. Will the capital position of PFC be adequate to absorb shocks to its asset quality?

Since PFC is notified as a public financial institution, it is currently exempted from compliance

with most of the prudential norms applicable to NBFCs. However, upon being classified as an

NBFC-IFC, PFC's regulatory framework is gradually converging with those applicable to other

NBFC-IFCs. PFC also has its own internal guidelines, many of which already comply with the

regulatory norms applicable to NBFCs, although not entirely (refer to Annexure II for details).

PFC's regulatory dispensation differs from that of other financiers in the following aspects:l PFC's exposure norms with respect to lending to SPUs are higher than those applicable to

NBFC-IFCs and banks; this allows PFC to retain its sector focus.l PFC's NPA recognition norms are less stringent than those of banks and NBFC-IFCs,

resulting in lower reported gross NPAs.l Standard asset provisioning is not applicable for PFC

PFC is formulating a roadmap (in consultation with the MoP) for submission to RBI by March

31, 2012, setting out the manner in which it intends to comply with RBI prudential norms.

Additionally, RBI, in its various reports, has indicated that it is reexamining the exemptions

granted to government-owned NBFCs. Hence, many of the regulatory concessions currently

available to PFC may be phased out gradually over the medium term. Given PFC's comfortable

capitalisation and earnings profile, CRISIL believes that it will comply with the stringent

regulatory norms applicable to NBFC-IFCs, barring exposure norms.

PFC has comfortable capitalisation; as on March 31, 2011, PFC had a Tier-I capital adequacy

ratio (CAR) of 14.7 per cent, an overall CAR of 15.7 per cent, and a net worth of Rs.152 billion.

PFC has raised around Rs.34.3 billion through its FPO in May 2011. Being classified as NBFC-

IFC, it is required to maintain minimum Tier-I and overall CAR of 10 per cent and 15 per cent,

respectively. Its gearing remains adequate, at around 5.6 times as on March 31, 2011 (5.1

times a year ago). PFC's capitalisation is supported by healthy accruals to net worth as

reflected in the three-year average return on net worth ratio of 18.8 per cent. PFC's accruals

are expected to remain comfortable over the medium term, backed by stable interest

spreads. Given the FPO proceeds and comfortable internal accruals, CRISIL believes that PFC

will maintain adequate capitalisation over the medium term.

Additionally, PFC has flexibility to raise additional equity capital by diluting GoI's shareholding

(currently at 73.72 per cent) to support growth plans over the medium term; PFC can raise

around Rs.74 billion if it dilutes GoI holding to 51 per cent at current market prices.

CRISIL has analysed the adequacy of capital under two scenarios (refer to CRISIL article 'Power

distribution utilities- current issues and what lies ahead’ for details), based on PFC's asset

quality risks, taking into account the risk classification of PFC's SPU exposures (refer to Chart 5)

and the expected stress on its private sector exposures.l In the base case, CRISIL assumed slippages of 10 per cent from the highest risk SPU

portfolio, 5 per cent from the high risk portfolio, and 5 per cent from the private sector

portfolio.l The stress scenario assumed slippages of 30 per cent from the highest risk SPU portfolio,

10 per cent from the high risk portfolio, and 10 per cent from the private sector portfolio.

As can be seen in Table 3, under the base case scenario, PFC is expected to manage the

increased asset quality challenges. Its capital coverage for exposure at risk is expected to be

around 5.3 times. However, under the stress case scenario, its net worth coverage for

exposure at risk is likely to be low, at around 2.0 times, and PFC would require additional

capital to maintain adequate coverage for the increased NPAs.

Table 3: Capital coverage for asset side risks

Power Sector Lenders: Will the credit quality trip?

Page 56: Crisil oct11

While PFC is currently exempt from standard asset provisioning requirements, it may need to

provide around Rs.3.0 billion in 2011-12 if it is required to make provisions based on NBFC

norms for the outstanding loans as on March 31, 2012. However, PFC has a reserve for bad and

doubtful debt, which, as on March 31, 2011, constituted around 1 per cent of total advances.

Another risk to earnings could be from the unhedged portion of foreign currency borrowings;

RBI allows strategic hedging by PFC. However, PFC monitors the exchange rate risk on a regular

basis.

CRISIL has also analysed the potential increase in provisioning requirements in the event of

inherent asset quality challenges playing out (refer to Table 5). PFC had exposure at risk of

Rs.36.6 billion (in the base case) and Rs.96.2 billion (in the stress case) as on March 31, 2011.

The analysis indicates that PFC will maintain adequate profitability even in a stress scenario. Table 5: Earnings impact of asset quality pressure

51

FAQs on Power Finance Corporation Limited

10. Will PFC’s profitability be under pressure in 2011-12, given the sharp increase in

borrowing costs over the past few months and increased competition from banks in

this lending space? What is the likely increase in provisioning requirement?PFC has demonstrated ability to manage profitability through interest rate cycles. PFC's Net

1Profitability Margin (NPM ; on a yearly average basis) is marked by adequate interest margins

and low operating expenses. Fee income forms a low proportion of overall income. Operating

expenses are significantly lower than those of banks and NBFCs, given that PFC does not have

branch costs and high employee costs.

Table 4: Trends in Net Profitability Margin

PFC's profitability has improved in the past few years, driven by comfortable interest spreads

following introduction of 3-and 10-year reset clauses on its long-term loans in 2007. Its

profitability is expected to remain comfortable. While domestic borrowing costs may

increase in 2011-12 because of hardening interest rates, PFC’s interest spreads will be

supported by ability to pass on a major part of this increase in the form of higher yields. The

pricing power is expected to be maintained over the next three or four years, given the large

financing requirements for the power sector. IFC status and improved net worth post the FPO

will also allow PFC to raise large ECBs. PFC's operating expenses ratio is expected to remain at

the current level, supporting its earnings profile.

Competition from banks is unlikely to increase materially over the next few years. The

competition between banks and PFC has not resulted in irrational pricing by either of them.

The differential in interest rates charged by banks and PFC is usually in between 25 and 50

basis points.

1 CRISIL uses NPM to analyse the core profitability of financing entities NPM is defined as (Yield on funds deployed) - (Average borrowing costs) - (Operating expense ratio) + (Fee income levels). The NPM calculation is based on CRISIL-adjusted numbers and hence would differ from the numbers reported by PFC. The interest spreads reported by PFC in the past four years (starting from the most recent) are 2.5 per cent, 2.6 per cent, 2.2 per cent, and 2.1 per cent.

Base Case Stress case

Exposure at risk Rs. Bn. 36.6 96.2

Provisions @10% for exposure at risk Rs. Bn. 3.7 9.6

Revised PBT Rs. Bn. 31.7 25.7

Revised PAT Rs. Bn. 23.5 19.1

Decline in PAT Per Cent 10.4 27.2

Revised RoA Per Cent 2.5 2.0

Power Sector Lenders: Will the credit quality trip?

2007-08

10.2

1.7

8.5

1.7

0.2

0.2

For the year 2010-11 2009-10 2008-09

Yield

Cost of borrowings

Interest spread

Opex.

Fee income

Net Profitability Margin (Pre-credit costs)

10.7

8.4

2.3

0.1

0.2

2.4

10.8

8.5

2.4

0.1

0.2

2.4 1.9

11.0

9.1

1.9

0.2

0.1

in per cent

Page 57: Crisil oct11

While PFC is currently exempt from standard asset provisioning requirements, it may need to

provide around Rs.3.0 billion in 2011-12 if it is required to make provisions based on NBFC

norms for the outstanding loans as on March 31, 2012. However, PFC has a reserve for bad and

doubtful debt, which, as on March 31, 2011, constituted around 1 per cent of total advances.

Another risk to earnings could be from the unhedged portion of foreign currency borrowings;

RBI allows strategic hedging by PFC. However, PFC monitors the exchange rate risk on a regular

basis.

CRISIL has also analysed the potential increase in provisioning requirements in the event of

inherent asset quality challenges playing out (refer to Table 5). PFC had exposure at risk of

Rs.36.6 billion (in the base case) and Rs.96.2 billion (in the stress case) as on March 31, 2011.

The analysis indicates that PFC will maintain adequate profitability even in a stress scenario. Table 5: Earnings impact of asset quality pressure

51

FAQs on Power Finance Corporation Limited

10. Will PFC’s profitability be under pressure in 2011-12, given the sharp increase in

borrowing costs over the past few months and increased competition from banks in

this lending space? What is the likely increase in provisioning requirement?PFC has demonstrated ability to manage profitability through interest rate cycles. PFC's Net

1Profitability Margin (NPM ; on a yearly average basis) is marked by adequate interest margins

and low operating expenses. Fee income forms a low proportion of overall income. Operating

expenses are significantly lower than those of banks and NBFCs, given that PFC does not have

branch costs and high employee costs.

Table 4: Trends in Net Profitability Margin

PFC's profitability has improved in the past few years, driven by comfortable interest spreads

following introduction of 3-and 10-year reset clauses on its long-term loans in 2007. Its

profitability is expected to remain comfortable. While domestic borrowing costs may

increase in 2011-12 because of hardening interest rates, PFC’s interest spreads will be

supported by ability to pass on a major part of this increase in the form of higher yields. The

pricing power is expected to be maintained over the next three or four years, given the large

financing requirements for the power sector. IFC status and improved net worth post the FPO

will also allow PFC to raise large ECBs. PFC's operating expenses ratio is expected to remain at

the current level, supporting its earnings profile.

Competition from banks is unlikely to increase materially over the next few years. The

competition between banks and PFC has not resulted in irrational pricing by either of them.

The differential in interest rates charged by banks and PFC is usually in between 25 and 50

basis points.

1 CRISIL uses NPM to analyse the core profitability of financing entities NPM is defined as (Yield on funds deployed) - (Average borrowing costs) - (Operating expense ratio) + (Fee income levels). The NPM calculation is based on CRISIL-adjusted numbers and hence would differ from the numbers reported by PFC. The interest spreads reported by PFC in the past four years (starting from the most recent) are 2.5 per cent, 2.6 per cent, 2.2 per cent, and 2.1 per cent.

Base Case Stress case

Exposure at risk Rs. Bn. 36.6 96.2

Provisions @10% for exposure at risk Rs. Bn. 3.7 9.6

Revised PBT Rs. Bn. 31.7 25.7

Revised PAT Rs. Bn. 23.5 19.1

Decline in PAT Per Cent 10.4 27.2

Revised RoA Per Cent 2.5 2.0

Power Sector Lenders: Will the credit quality trip?

2007-08

10.2

1.7

8.5

1.7

0.2

0.2

For the year 2010-11 2009-10 2008-09

Yield

Cost of borrowings

Interest spread

Opex.

Fee income

Net Profitability Margin (Pre-credit costs)

10.7

8.4

2.3

0.1

0.2

2.4

10.8

8.5

2.4

0.1

0.2

2.4 1.9

11.0

9.1

1.9

0.2

0.1

in per cent

Page 58: Crisil oct11

53

FAQs on Power Finance Corporation Limited

State PFC’s Exposure (Rs. Bn.)

Maharashtra 105.3

Rajasthan 89.0

Andhra Pradesh 77.3

Uttar Pradesh 75.2

Tamil Nadu 55.1

Madhya Pradesh 51.2

Chhattisgarh 37.5

Haryana 33.2

West Bengal 26.4

Gujarat 24.3

Karnataka 16.2

Delhi 15.6

Uttarakhand 10.4

Himachal Pradesh 10.1

Jammu& Kashmir 7.6

Bihar 2.2

Assam 2.2

Jharkhand 1.2

Punjab 1.2

Orissa 1.1

Sikkim 1.0

Meghalaya 1.0

Others 1.1

TOTAL 645.1

Annexure I- State-wise break-up of PFC's SPU exposures

Power Sector Lenders: Will the credit quality trip?

Annexure II- Regulatory Framework for Banks, IFCs and PFC

S. No Parameter Banks IFCs PFC Comments

1 Exposure Limits

Lending to single borrower

20% of capital funds for infra exposures

25% of owned funds i. 100 per cent of net worth for central power utilities and state power utilities; can go up by another 50%ii In respect of private projects/ utilities, PFC follows RBI guidelines i.e. single borrower limit of 25%, and group borrower limit of 40% of its owned funds.

Exposure norms for SPUs higher than that for IFCs and banks allows them to grow their book and maintian competitveness. However, it also results in higher concentration risks.

Lending to a single group of borrowers

40% of owned funds

2 NPA recognition

Days past due (dpd) NPA recognition at 90+ dpd

NPA recognition at 180+ dpd

NPA recognition at 180+ dpd. Reported NPAs lower than would be case if banks' NPA recognition norms were followed. GNPA would be around 1% if banking norms were applied

Facility wise / Borrower wise

Borrower wise (i.e. all the loans of the borrower are classified as NPAs)

Loans to state/central sector entities are considered loan/facility wise. Loans to private sector entities are considered borrower wise

Provisioning requirements

For NPAsSubstandard Doubtful (> 3 years)Loss

15%25% to 100%100%

10%20% to 50%100%

10%20% - 100% depending on period for which asset has been substandard

No material impact because of low GNPA levels

For standard assets 0.40% of standard assets (other than CRE, agri, SME, teaser loans)

0.25% of standard assets (w.e.f. March 2012)

Currently not applicable Profits (before tax) will be be lower by about Rs.3.0 billion in 2011-12 if this is introduced

4 Capital adequacy

Tier I CAR 6% 10% 10% No impact

Overall CAR 9% 15% 15% No impact

Risk weights Rating wise 100% 100% (except for state govt guaranteed exposures which carry 20%)

Existing norms in line with that applicable for NBFCs

5 Asset Liability Management

Limit on negative mismatches upto 30 days (as % of the cash outflows in the respective time buckets)

Next day 5%2-7 days 10%8-14 days 15%15-28 days 20%

1 to 30/31 days time-bucket should not exceed 15 % of outflows of each time-bucket and the cumulative gap upto 1 year period should not exceed 15% of the cumulative cash outflows upto 1 year.

No regulatory ALM limits are applicable. Internal limits are fixed by a consultant; currently negative mismatches should not exceed 15% of total outflows in the next 12 months bucket. PFC’s Asset Liability Management Committee continuously monitors the ALM position and additional borrowings are done with the mismatches under consideration.

While there is no regulatory ALM limits, ALM position is comfortable with manageable level of mismatches and low dependence on ST borrowings

3

50% of capital funds forinfra exposures

Page 59: Crisil oct11

53

FAQs on Power Finance Corporation Limited

State PFC’s Exposure (Rs. Bn.)

Maharashtra 105.3

Rajasthan 89.0

Andhra Pradesh 77.3

Uttar Pradesh 75.2

Tamil Nadu 55.1

Madhya Pradesh 51.2

Chhattisgarh 37.5

Haryana 33.2

West Bengal 26.4

Gujarat 24.3

Karnataka 16.2

Delhi 15.6

Uttarakhand 10.4

Himachal Pradesh 10.1

Jammu& Kashmir 7.6

Bihar 2.2

Assam 2.2

Jharkhand 1.2

Punjab 1.2

Orissa 1.1

Sikkim 1.0

Meghalaya 1.0

Others 1.1

TOTAL 645.1

Annexure I- State-wise break-up of PFC's SPU exposures

Power Sector Lenders: Will the credit quality trip?

Annexure II- Regulatory Framework for Banks, IFCs and PFC

S. No Parameter Banks IFCs PFC Comments

1 Exposure Limits

Lending to single borrower

20% of capital funds for infra exposures

25% of owned funds i. 100 per cent of net worth for central power utilities and state power utilities; can go up by another 50%ii In respect of private projects/ utilities, PFC follows RBI guidelines i.e. single borrower limit of 25%, and group borrower limit of 40% of its owned funds.

Exposure norms for SPUs higher than that for IFCs and banks allows them to grow their book and maintian competitveness. However, it also results in higher concentration risks.

Lending to a single group of borrowers

40% of owned funds

2 NPA recognition

Days past due (dpd) NPA recognition at 90+ dpd

NPA recognition at 180+ dpd

NPA recognition at 180+ dpd. Reported NPAs lower than would be case if banks' NPA recognition norms were followed. GNPA would be around 1% if banking norms were applied

Facility wise / Borrower wise

Borrower wise (i.e. all the loans of the borrower are classified as NPAs)

Loans to state/central sector entities are considered loan/facility wise. Loans to private sector entities are considered borrower wise

Provisioning requirements

For NPAsSubstandard Doubtful (> 3 years)Loss

15%25% to 100%100%

10%20% to 50%100%

10%20% - 100% depending on period for which asset has been substandard

No material impact because of low GNPA levels

For standard assets 0.40% of standard assets (other than CRE, agri, SME, teaser loans)

0.25% of standard assets (w.e.f. March 2012)

Currently not applicable Profits (before tax) will be be lower by about Rs.3.0 billion in 2011-12 if this is introduced

4 Capital adequacy

Tier I CAR 6% 10% 10% No impact

Overall CAR 9% 15% 15% No impact

Risk weights Rating wise 100% 100% (except for state govt guaranteed exposures which carry 20%)

Existing norms in line with that applicable for NBFCs

5 Asset Liability Management

Limit on negative mismatches upto 30 days (as % of the cash outflows in the respective time buckets)

Next day 5%2-7 days 10%8-14 days 15%15-28 days 20%

1 to 30/31 days time-bucket should not exceed 15 % of outflows of each time-bucket and the cumulative gap upto 1 year period should not exceed 15% of the cumulative cash outflows upto 1 year.

No regulatory ALM limits are applicable. Internal limits are fixed by a consultant; currently negative mismatches should not exceed 15% of total outflows in the next 12 months bucket. PFC’s Asset Liability Management Committee continuously monitors the ALM position and additional borrowings are done with the mismatches under consideration.

While there is no regulatory ALM limits, ALM position is comfortable with manageable level of mismatches and low dependence on ST borrowings

3

50% of capital funds forinfra exposures

Page 60: Crisil oct11

55

FAQs on Rural Electrification Corporation Limited

CRISIL has existing ratings of 'CRISIL AAA/Stable/CRISIL A1+' on Rural Electrification

Corporation Limited's (REC's) debt instruments. In this article, CRISIL answers the questions

most frequently asked by investors regarding the ratings.

CRISIL's ratings on REC's debt instruments are driven by the corporation's high strategic

importance to GoI; this strategic importance is reflected in REC's role in implementing GoI

policies, and its importance in financing India's power sector, particularly state power utilities

(SPUs). Additionally, majority ownership by GoI implies a strong moral obligation on the

government to support REC in the event of an exigency.

REC is the nodal agency for channeling finance for GoI's rural electrification programme under

Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). RGGVY aims at electrifying all villages

and habitations, providing access to electricity to all rural households, and providing

electricity connection free of charge to below-poverty-line (BPL) families. Under the

programme, 90 per cent grant is provided by GoI, while REC provides 10 per cent as loan to the

state governments. The loans have tenure of 15 years, with a 5-year moratorium on the

principal. As on March 31, 2011, 96,562 villages had been electrified and 15.98 million free

electricity connections had been released to BPL households. The cumulative disbursements

by REC towards RGGVY stood at Rs.228.8 billion till March 31, 2011.

REC also plays a significant role in financing the power sector in India:l REC is the second largest lender to the power sector (refer to Chart 1): its total outstanding

loans were about thrice the size of the power sector exposure of the largest Indian bank.

With advances of Rs.821.32 billion, REC had a share of about 17 per cent in the total

outstanding advances to the power sector as on March 31, 2011.

1. Why is REC strategically important to the Government of India (GoI)? What is the extent

of support from GoI that has been factored into REC's ratings?

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Page 61: Crisil oct11

55

FAQs on Rural Electrification Corporation Limited

CRISIL has existing ratings of 'CRISIL AAA/Stable/CRISIL A1+' on Rural Electrification

Corporation Limited's (REC's) debt instruments. In this article, CRISIL answers the questions

most frequently asked by investors regarding the ratings.

CRISIL's ratings on REC's debt instruments are driven by the corporation's high strategic

importance to GoI; this strategic importance is reflected in REC's role in implementing GoI

policies, and its importance in financing India's power sector, particularly state power utilities

(SPUs). Additionally, majority ownership by GoI implies a strong moral obligation on the

government to support REC in the event of an exigency.

REC is the nodal agency for channeling finance for GoI's rural electrification programme under

Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). RGGVY aims at electrifying all villages

and habitations, providing access to electricity to all rural households, and providing

electricity connection free of charge to below-poverty-line (BPL) families. Under the

programme, 90 per cent grant is provided by GoI, while REC provides 10 per cent as loan to the

state governments. The loans have tenure of 15 years, with a 5-year moratorium on the

principal. As on March 31, 2011, 96,562 villages had been electrified and 15.98 million free

electricity connections had been released to BPL households. The cumulative disbursements

by REC towards RGGVY stood at Rs.228.8 billion till March 31, 2011.

REC also plays a significant role in financing the power sector in India:l REC is the second largest lender to the power sector (refer to Chart 1): its total outstanding

loans were about thrice the size of the power sector exposure of the largest Indian bank.

With advances of Rs.821.32 billion, REC had a share of about 17 per cent in the total

outstanding advances to the power sector as on March 31, 2011.

1. Why is REC strategically important to the Government of India (GoI)? What is the extent

of support from GoI that has been factored into REC's ratings?

Power Sector Lenders: Will the credit quality trip?

A knowledge sharing endeavour from CRISIL

Insights

Page 62: Crisil oct11

57

Chart 1: Largest lenders to the power sector

Source: Company Data, Annual Reports

l The importance of REC in channeling financing to the domestic power sector is

underscored by the fact that PFC, together with REC, accounted for about 42 per cent of

the aggregate debt outstanding of SPUs as on March 31, 2010 (the latest period for which

data is available; refer to Chart 2). In the Indian context, SPUs form the back bone of the

power sector, with more than 40 per cent of the country's generation capacity and 95 per

cent of the distribution network. The share of PFC and REC is estimated to have reduced to

about 40 per cent as on March 31, 2011, as banks have increased their exposure to the

power sector; the share is, however, unlikely to reduce further. Clearly, REC will remain a

key financier to SPUs, and therefore, play a key role in sustaining their operations.

Chart 2: Source of SPUs' borrowings as on March 31, 2010

Source: PFC report “Performance of State Power Utilities for the Years 2007-08 to 2009-10”

Additionally, majority ownership and a strong public perception of sovereign backing implies

a strong moral obligation on GoI to support REC in the event of distress. Given REC's strategic

role in implementing GoI's policy, channeling finance to the power sector, especially SPUs,

and ensuring the sustainability of SPUs, and GoI's majority ownership of REC, CRISIL believes

that REC will continue to benefit from substantial support from GoI when necessary.

As on June 30, 2011, GoI had stake of around 67 per cent in REC. REC raised Rs.26.28 billion

through a follow-on public offering in February 2010, which resulted in dilution of GoI's

shareholding to 66.8 per cent from 81.2 per cent as on December 31, 2009. In line with its

policy for 'Navratna' companies, GoI is, however, expected to retain majority ownership in

REC.

In the past, GoI has supported REC by granting it special status to raise capital gains exemption

bonds (under Section 54EC of the Income-tax Act, 1961), allowing issue of tax-free bonds, and

through asset protection mechanisms such as providing access to Central Plan Allocation

funds for recovering dues from SPUs that have delayed repayments. REC's board of directors

also has representation from the Ministry of Power (MoP).

2. Does CRISIL expect GoI to divest its majority shareholding in REC? What is the nature of

support that GoI has provided, and is expected to provide, to REC?

996

821

295

282

267

232

171

0 100 200 300 400 500 600 700 800 900 1000

PFC

REC

SBI

Canara Bank

IDFC

IDBI Bank

Central Bank of India

Advances-Power (Rs. Billion)

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

REC21.1%

Banks/FIs/Bonds58.3%

PFC20.6%

Page 63: Crisil oct11

57

Chart 1: Largest lenders to the power sector

Source: Company Data, Annual Reports

l The importance of REC in channeling financing to the domestic power sector is

underscored by the fact that PFC, together with REC, accounted for about 42 per cent of

the aggregate debt outstanding of SPUs as on March 31, 2010 (the latest period for which

data is available; refer to Chart 2). In the Indian context, SPUs form the back bone of the

power sector, with more than 40 per cent of the country's generation capacity and 95 per

cent of the distribution network. The share of PFC and REC is estimated to have reduced to

about 40 per cent as on March 31, 2011, as banks have increased their exposure to the

power sector; the share is, however, unlikely to reduce further. Clearly, REC will remain a

key financier to SPUs, and therefore, play a key role in sustaining their operations.

Chart 2: Source of SPUs' borrowings as on March 31, 2010

Source: PFC report “Performance of State Power Utilities for the Years 2007-08 to 2009-10”

Additionally, majority ownership and a strong public perception of sovereign backing implies

a strong moral obligation on GoI to support REC in the event of distress. Given REC's strategic

role in implementing GoI's policy, channeling finance to the power sector, especially SPUs,

and ensuring the sustainability of SPUs, and GoI's majority ownership of REC, CRISIL believes

that REC will continue to benefit from substantial support from GoI when necessary.

As on June 30, 2011, GoI had stake of around 67 per cent in REC. REC raised Rs.26.28 billion

through a follow-on public offering in February 2010, which resulted in dilution of GoI's

shareholding to 66.8 per cent from 81.2 per cent as on December 31, 2009. In line with its

policy for 'Navratna' companies, GoI is, however, expected to retain majority ownership in

REC.

In the past, GoI has supported REC by granting it special status to raise capital gains exemption

bonds (under Section 54EC of the Income-tax Act, 1961), allowing issue of tax-free bonds, and

through asset protection mechanisms such as providing access to Central Plan Allocation

funds for recovering dues from SPUs that have delayed repayments. REC's board of directors

also has representation from the Ministry of Power (MoP).

2. Does CRISIL expect GoI to divest its majority shareholding in REC? What is the nature of

support that GoI has provided, and is expected to provide, to REC?

996

821

295

282

267

232

171

0 100 200 300 400 500 600 700 800 900 1000

PFC

REC

SBI

Canara Bank

IDFC

IDBI Bank

Central Bank of India

Advances-Power (Rs. Billion)

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

REC21.1%

Banks/FIs/Bonds58.3%

PFC20.6%

Page 64: Crisil oct11

59

In recent times, GoI has stepped up its direct support to sectors that are considered critical for

economic growth and stability. For instance, in the aftermath of the financial crisis in 2008-09

(refers to financial year, April 1 to March 31), GoI has expanded its support for public sector

banks (PSBs) by infusing aggregate fresh equity capital of Rs.232 billion over the past three

years, and increasing its stake in PSBs to 58 per cent. It has also publicly committed to ensure

that PSBs maintain capital adequacy ratio (CAR) of 12 per cent on a steady state basis.

CRISIL, therefore, believes that despite decline in its ownership, GoI will continue to provide

policy support and an enabling environment to REC, given the criticality of power for

sustaining India's economic development and REC's importance as a lender to SPUs. The

support may include measures such as asset protection mechanisms and funding support,

including special status to raise low-cost resources as and when required.

As Chart 1 indicates, REC is among the top three financers to the domestic power sector. As

per CRISIL estimates, power sector advances constitute around 60 per cent of the aggregate

advances to the infrastructure sector of approximately Rs.8 trillion. REC is the second largest

provider of finance to the power sector, with a market share of around 17 per cent as on

March 31, 2011. In particular, REC is the key entity for financing transmission and distribution

projects being implemented by SPUs in the country.

Over the past few years, competition for funding the power sector has increased

substantially; this is reflected in strong growth in the banking industry's advances to the

sector, especially in 2009-10 and 2010-11, when growth rates were at 51 per cent and 43 per

cent, respectively, far higher than the overall credit growth. REC's share has moderated in this

period (refer to Chart 3).

3 What is REC's competitive position in the infrastructure financing space? How is REC

expected to maintain this position, in light of current challenges faced by the power sector?

Chart 3: Trend in share of banks and power financiers

Source: Company data, RBI data

However, the average tenor of the banks' liabilities is estimated at 2.5 years, while

infrastructure exposures are typically of a substantially longer tenor. Given the inherent

mismatch, banks will face challenges in taking substantial incremental infrastructure

exposures. Also, the share of the power sector in the total infrastructure advances and in the

total advances of banks has increased (refer to Chart 4).

Chart 4: Share of power sector in total banking sector non-food credit

Source: RBI data

49 53 56

25 23 21

20 19 17

6 6 7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011

As on March 31

Banks PFC REC Other IFCs

4.8

6.2

7.3

0%

2%

4%

6%

8%

10%

2009 2010

As on March 31

Share of power sector

2011

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Page 65: Crisil oct11

59

In recent times, GoI has stepped up its direct support to sectors that are considered critical for

economic growth and stability. For instance, in the aftermath of the financial crisis in 2008-09

(refers to financial year, April 1 to March 31), GoI has expanded its support for public sector

banks (PSBs) by infusing aggregate fresh equity capital of Rs.232 billion over the past three

years, and increasing its stake in PSBs to 58 per cent. It has also publicly committed to ensure

that PSBs maintain capital adequacy ratio (CAR) of 12 per cent on a steady state basis.

CRISIL, therefore, believes that despite decline in its ownership, GoI will continue to provide

policy support and an enabling environment to REC, given the criticality of power for

sustaining India's economic development and REC's importance as a lender to SPUs. The

support may include measures such as asset protection mechanisms and funding support,

including special status to raise low-cost resources as and when required.

As Chart 1 indicates, REC is among the top three financers to the domestic power sector. As

per CRISIL estimates, power sector advances constitute around 60 per cent of the aggregate

advances to the infrastructure sector of approximately Rs.8 trillion. REC is the second largest

provider of finance to the power sector, with a market share of around 17 per cent as on

March 31, 2011. In particular, REC is the key entity for financing transmission and distribution

projects being implemented by SPUs in the country.

Over the past few years, competition for funding the power sector has increased

substantially; this is reflected in strong growth in the banking industry's advances to the

sector, especially in 2009-10 and 2010-11, when growth rates were at 51 per cent and 43 per

cent, respectively, far higher than the overall credit growth. REC's share has moderated in this

period (refer to Chart 3).

3 What is REC's competitive position in the infrastructure financing space? How is REC

expected to maintain this position, in light of current challenges faced by the power sector?

Chart 3: Trend in share of banks and power financiers

Source: Company data, RBI data

However, the average tenor of the banks' liabilities is estimated at 2.5 years, while

infrastructure exposures are typically of a substantially longer tenor. Given the inherent

mismatch, banks will face challenges in taking substantial incremental infrastructure

exposures. Also, the share of the power sector in the total infrastructure advances and in the

total advances of banks has increased (refer to Chart 4).

Chart 4: Share of power sector in total banking sector non-food credit

Source: RBI data

49 53 56

25 23 21

20 19 17

6 6 7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011

As on March 31

Banks PFC REC Other IFCs

4.8

6.2

7.3

0%

2%

4%

6%

8%

10%

2009 2010

As on March 31

Share of power sector

2011

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Page 66: Crisil oct11

61

REC also has a strong pipeline of undisbursed sanctions. Given the large volume of financing

required in the power sector, and the fact that banks focus on multiple sectors, CRISIL believes

that REC will maintain its strong competitive position in this space. This is reflected in the fact

that REC's loan portfolio is about three times the size of the power sector portfolio of India's

largest bank. Also, banks are focused on specific tenors (of less than five years) and segments

(mostly private generation projects). This enhances REC's role as one of the main providers of

finance to the power sector, particularly SPUs.

REC faces asset quality challenges on account of three main factors:l Weak financial risk profiles of the largest borrower segment - SPUs (around 83 per cent of

its advances were to SPUs as on March 31, 2011, as against 85 per cent as on March 31,

2009), l Sectoral concentration l Key account concentration, which may lead to large exposures turning into non-

performing assets (NPAs); the top 10 borrowers accounted for about 46.5 per cent of

REC's advances as on March 31, 2011, as against 45 per cent as on March 31, 2009.

The first of these is the most critical, while the second will continue to exist given the mandate.

REC, nevertheless, has been able to mitigate these risks and maintain low gross NPAs (of 0.02

per cent as on March 31, 2011) and healthy collection efficiency. Its collection efficiency has

remained high (at around 99 per cent on average) in the past three years. This is owing to its

criticality to borrowers and the asset protection mechanisms in place.l REC halts any further disbursement on a facility if there is delay by the borrower in

payment on another facility. SPUs, therefore, delay payments to REC only as a last resort,

because lack of access to REC funding will substantially curb their operations and lead to

increase in interest payment on the entire debt availed of from REC. As on March 31, 2011,

most of REC's NPAs were from the private sector.l Additionally, REC has set in place several asset protection mechanisms for state/central

sector and private borrowers.m Advances to the central and state sector are generally secured either through a charge

on project assets, or by a state government guarantee, or both. In addition, as on

4. Given REC's significant exposure to SPUs and the high sectoral and customer

concentration, how does it manage the asset quality risks in its portfolio?

March 31, 2011, about 80 per cent of outstanding loans to the state and central power

sector involved an escrow mechanism. However, state government guarantees will

not be extended henceforth, and the proportion of loans covered by such a guarantee

may, therefore, reduce over time. Currently the proportion of loans having state

government guarantees is 27 per cent. Nevertheless, use of fallback mechanisms such

as an escrow account has been minimal. m In respect of private sector loans, REC has asset protection mechanisms such as pari

passu charge on the relevant project assets, trust and retention account, collaterals

such as personal/corporate guarantees, and pledges of shares held by the promoters.l Private sector projects increasingly face challenges such as fuel availability, power

purchase agreements with SPUs for assured power offtake, and uncertainties related to

regulatory clearance. REC has also revised its loan policies in light of the changing

dynamics in the sector:m REC insists that projects have coal and water linkages, and land for the main plant

area, before disbursing loansm REC also insists that reasonable tariff is quoted, and that power purchase agreements

have clauses for passing on any rise in fuel prices.

REC has maintained a good collection performance till date. CRISIL, however, believes that

asset quality pressures may intensify in future if deterioration in the performance of SPUs is

not arrested. Additionally, given the high concentration risk, financial stress on any of these

borrowers could lead to significant increase in NPA levels for REC. While CRISIL does not expect

significant impairment in REC's lending portfolio in the near term, its underwriting and credit

monitoring mechanisms, and the financial health of SPUs will be key monitorables over the

medium term.

CRISIL has analysed REC's state-wise SPU exposures (refer to Annexure I for details) and

classified these exposures based on risk levels. The risk levels were identified based on the

performance of the distribution companies, and applied to the total exposure to the state on

account of linkages among generation, transmission, and distribution companies.

Given the politically sensitive nature of electricity and the fact that SPUs operate as an arm of

5. REC has reported low gross NPAs. How does CRISIL analyse inherent risks in REC's

portfolio?

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Page 67: Crisil oct11

61

REC also has a strong pipeline of undisbursed sanctions. Given the large volume of financing

required in the power sector, and the fact that banks focus on multiple sectors, CRISIL believes

that REC will maintain its strong competitive position in this space. This is reflected in the fact

that REC's loan portfolio is about three times the size of the power sector portfolio of India's

largest bank. Also, banks are focused on specific tenors (of less than five years) and segments

(mostly private generation projects). This enhances REC's role as one of the main providers of

finance to the power sector, particularly SPUs.

REC faces asset quality challenges on account of three main factors:l Weak financial risk profiles of the largest borrower segment - SPUs (around 83 per cent of

its advances were to SPUs as on March 31, 2011, as against 85 per cent as on March 31,

2009), l Sectoral concentration l Key account concentration, which may lead to large exposures turning into non-

performing assets (NPAs); the top 10 borrowers accounted for about 46.5 per cent of

REC's advances as on March 31, 2011, as against 45 per cent as on March 31, 2009.

The first of these is the most critical, while the second will continue to exist given the mandate.

REC, nevertheless, has been able to mitigate these risks and maintain low gross NPAs (of 0.02

per cent as on March 31, 2011) and healthy collection efficiency. Its collection efficiency has

remained high (at around 99 per cent on average) in the past three years. This is owing to its

criticality to borrowers and the asset protection mechanisms in place.l REC halts any further disbursement on a facility if there is delay by the borrower in

payment on another facility. SPUs, therefore, delay payments to REC only as a last resort,

because lack of access to REC funding will substantially curb their operations and lead to

increase in interest payment on the entire debt availed of from REC. As on March 31, 2011,

most of REC's NPAs were from the private sector.l Additionally, REC has set in place several asset protection mechanisms for state/central

sector and private borrowers.m Advances to the central and state sector are generally secured either through a charge

on project assets, or by a state government guarantee, or both. In addition, as on

4. Given REC's significant exposure to SPUs and the high sectoral and customer

concentration, how does it manage the asset quality risks in its portfolio?

March 31, 2011, about 80 per cent of outstanding loans to the state and central power

sector involved an escrow mechanism. However, state government guarantees will

not be extended henceforth, and the proportion of loans covered by such a guarantee

may, therefore, reduce over time. Currently the proportion of loans having state

government guarantees is 27 per cent. Nevertheless, use of fallback mechanisms such

as an escrow account has been minimal. m In respect of private sector loans, REC has asset protection mechanisms such as pari

passu charge on the relevant project assets, trust and retention account, collaterals

such as personal/corporate guarantees, and pledges of shares held by the promoters.l Private sector projects increasingly face challenges such as fuel availability, power

purchase agreements with SPUs for assured power offtake, and uncertainties related to

regulatory clearance. REC has also revised its loan policies in light of the changing

dynamics in the sector:m REC insists that projects have coal and water linkages, and land for the main plant

area, before disbursing loansm REC also insists that reasonable tariff is quoted, and that power purchase agreements

have clauses for passing on any rise in fuel prices.

REC has maintained a good collection performance till date. CRISIL, however, believes that

asset quality pressures may intensify in future if deterioration in the performance of SPUs is

not arrested. Additionally, given the high concentration risk, financial stress on any of these

borrowers could lead to significant increase in NPA levels for REC. While CRISIL does not expect

significant impairment in REC's lending portfolio in the near term, its underwriting and credit

monitoring mechanisms, and the financial health of SPUs will be key monitorables over the

medium term.

CRISIL has analysed REC's state-wise SPU exposures (refer to Annexure I for details) and

classified these exposures based on risk levels. The risk levels were identified based on the

performance of the distribution companies, and applied to the total exposure to the state on

account of linkages among generation, transmission, and distribution companies.

Given the politically sensitive nature of electricity and the fact that SPUs operate as an arm of

5. REC has reported low gross NPAs. How does CRISIL analyse inherent risks in REC's

portfolio?

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Page 68: Crisil oct11

63

the respective state governments, CRISIL believes that the state governments will continue to

support the SPUs in making payments to REC. REC has substantial exposure to high-risk SPUs.

Nevertheless, the ability of state governments to support SPUs mitigates asset quality risks on

these exposures. CRISIL has, therefore, mapped these exposures against state finances to

arrive at a risk matrix that identifies the ultimate risk in REC's loan book (refer to CRISIL article

'Credit quality of power sector lenders - potential risks ahead' for methodology).

Chart 5: Risk matrix of SPU exposures

CRISIL has, thus, classified REC's SPU exposures as follows:

Table 1: Risk classification of REC's SPU exposures

CRISIL analyses potential slippages from the highest and high risk portfolios and the private

sector exposure to estimate the adequacy of capital to cover these asset-side risks and the

impact on earnings should the risks materialise.

REC's NPA recognition norms differ from those of banks in two aspects:l REC recognises NPAs at 180 days-past-due (dpd), while banks do so at 90-dpd. l For loans to SPUs, REC recognises NPAs facility-wise - in other words, only those facilities

that are 180-dpd are classified as NPAs; banks on the other hand classify all facilities of the

borrower as NPAs if any one facility has breached the 90-dpd mark.

For REC's exposures to the private sector, while NPAs are recognised at 180-dpd, any

individual facility turning into a NPA will lead to the entire exposure to that specific entity

being classified as NPA.

To estimate REC's gross NPA levels as consistent with banking norms, CRISIL has considered

REC's total exposure to borrowers with overdues of 90 days and more. This amounts to Rs.2.96

billion. Therefore, even if the banking NPA recognition norms were applied to REC, its gross

NPA levels are unlikely to increase significantly. Adjusted gross NPAs would stand at less than

0.5 per cent as on March 31, 2011, against the banking industry gross NPA average of 2.3 per

cent.

6. How will REC's gross NPA levels be affected if banks' NPA recognition norms were

applied to REC?

Exposure in Rs. Billion Share in total SPU exposure

Highest Risk 229.1 36.7%

High Risk 236.1 37.9%

Moderate Risk 157.2 25.2%

Low Risk 1.4 0.2%

Total SPU exposure 623.5 100.0%

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Cluster IV(Lowest)

Himachal PradeshWest Bengal

BiharJammu & KashmirNorth Eastern States (excluding Assam)

Cluster IIIKerala

Uttarakhand

JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh

AssamOrissa

Cluster IIGoa

GujaratChhattisgarhMaharashtra

Andhra PradeshHaryanaTamil Nadu

Cluster I (Highest)

Delhi Karnataka

Low Risk Moderate Risk High Risk

Risk profile of State Power Utilities

Stat

e G

ove

rnm

ent

abili

ty t

o s

up

po

rt

Highest Risk Moderate RiskHigh Risk Low Risk

Page 69: Crisil oct11

63

the respective state governments, CRISIL believes that the state governments will continue to

support the SPUs in making payments to REC. REC has substantial exposure to high-risk SPUs.

Nevertheless, the ability of state governments to support SPUs mitigates asset quality risks on

these exposures. CRISIL has, therefore, mapped these exposures against state finances to

arrive at a risk matrix that identifies the ultimate risk in REC's loan book (refer to CRISIL article

'Credit quality of power sector lenders - potential risks ahead' for methodology).

Chart 5: Risk matrix of SPU exposures

CRISIL has, thus, classified REC's SPU exposures as follows:

Table 1: Risk classification of REC's SPU exposures

CRISIL analyses potential slippages from the highest and high risk portfolios and the private

sector exposure to estimate the adequacy of capital to cover these asset-side risks and the

impact on earnings should the risks materialise.

REC's NPA recognition norms differ from those of banks in two aspects:l REC recognises NPAs at 180 days-past-due (dpd), while banks do so at 90-dpd. l For loans to SPUs, REC recognises NPAs facility-wise - in other words, only those facilities

that are 180-dpd are classified as NPAs; banks on the other hand classify all facilities of the

borrower as NPAs if any one facility has breached the 90-dpd mark.

For REC's exposures to the private sector, while NPAs are recognised at 180-dpd, any

individual facility turning into a NPA will lead to the entire exposure to that specific entity

being classified as NPA.

To estimate REC's gross NPA levels as consistent with banking norms, CRISIL has considered

REC's total exposure to borrowers with overdues of 90 days and more. This amounts to Rs.2.96

billion. Therefore, even if the banking NPA recognition norms were applied to REC, its gross

NPA levels are unlikely to increase significantly. Adjusted gross NPAs would stand at less than

0.5 per cent as on March 31, 2011, against the banking industry gross NPA average of 2.3 per

cent.

6. How will REC's gross NPA levels be affected if banks' NPA recognition norms were

applied to REC?

Exposure in Rs. Billion Share in total SPU exposure

Highest Risk 229.1 36.7%

High Risk 236.1 37.9%

Moderate Risk 157.2 25.2%

Low Risk 1.4 0.2%

Total SPU exposure 623.5 100.0%

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Cluster IV(Lowest)

Himachal PradeshWest Bengal

BiharJammu & KashmirNorth Eastern States (excluding Assam)

Cluster IIIKerala

Uttarakhand

JharkhandMadhya PradeshPunjabRajasthanUttar Pradesh

AssamOrissa

Cluster IIGoa

GujaratChhattisgarhMaharashtra

Andhra PradeshHaryanaTamil Nadu

Cluster I (Highest)

Delhi Karnataka

Low Risk Moderate Risk High Risk

Risk profile of State Power Utilities

Stat

e G

ove

rnm

ent

abili

ty t

o s

up

po

rt

Highest Risk Moderate RiskHigh Risk Low Risk

Page 70: Crisil oct11

7. Does the wholesale resource profile of REC add any risks to its business profile? How

does REC manage its asset-liability management (ALM) profile?While REC's resource profile is wholesale in nature, this does not add significant risks to its

business profile as REC is able to manage this well. REC's instruments have wide market

acceptability, as reflected in their diversified investor base with a long-term investment

horizon, including Life Insurance Corporation of India (LIC), pension funds, and gratuity funds.

Other investors include mutual funds, banks, and retail investors (for 54EC capital gains bonds,

and infrastructure bonds). This allows REC to borrow at low spreads over G-Secs. RECs

resource profile is also supported by its ability to raise low-cost funds through capital gains

bonds. Its cost of borrowing declined marginally to 7.7 per cent in 2010-11 from 7.8 per cent in

2009-10.

Table 2: REC's resource profile

Chart 6: Borrowing profile as on March 31, 2011

65

Amount % Amount % Amount %

Capital Gains bonds 113 16.2 99 17.8 144 32.0

Institutional Bonds 399 57.0 309 55.2 182 40.6

Banks, FI, CP etc 112 16.0 106 18.9 95 21.2

Foreign Currency 76 10.8 21 3.7 15 3.3

CP - - 25 4.4 13 2.9

Total 700 100.0 560 100.0 449 100.0

Borrowing Costs (%) 7.7 7.8 7.3

2011 2010 2009

As seen in Chart 6, bonds constituted around 57 per cent of REC's outstanding borrowings as

on March 31, 2011, and are usually subscribed to by long-term investors such as LIC, pension

and gratuity funds, and insurance companies. REC also has a sizeable proportion of retail

funding given that it raises low-cost capital gains bonds (around 16 per cent) under Section

54EC of Income Tax Act, 1961. REC's reliance on bank borrowings (around 16 per cent) is not

very high. Therefore, the dependence on banks, which are also lenders to the power sector, is

low.

Furthermore, during 2010-11, REC's resource profile was supported by the substantially

higher funds raised through foreign currency borrowings; REC raised Rs.57.0 billion in 2010-11

as against Rs.6.1 billion in 2009-10 through foreign currency borrowings. Accordingly, foreign

currency borrowings constituted about 11 per cent of REC's total borrowings as on March 31,

2011 (about 4 per cent as on March 31, 2010). Additionally, REC was granted infrastructure

financing non-banking finance company (NBFC-IFC) status in 2010-11. This has increased its

flexibility to raise more funds through foreign currency borrowings at lower costs (up to 50 per

cent of its net worth, subject to a limit of USD500 million per year under the automatic route

as compared to the approval route earlier) to manage its resource profile. REC has a policy of

hedging risks associated with foreign currency borrowings for a significant portion of such

borrowings, while the remaining portion is left unhedged and remains exposed to the risk of

depreciation. While REC has internal limits for such unhedged exposure, and regularly

monitors such positions, any adverse movement in foreign exchange or interest rates may

constrain the corporation's earnings, especially if the proportion of unhedged foreign

currency borrowings is high.

Additionally, upon being classified as an NBFC-IFC, banks' exposure limit to REC has increased

by 5 per cent of their capital funds. The risk weight for exposure to REC is linked to its credit

rating and is significantly lower; this is expected to translate into lower cost of funds through

bank borrowings.

REC's resource profile is likely to remain wholesale in nature as it needs to raise long-term

funds to ensure adequate matching of its assets and liabilities; this is primarily driven by the

long tenure of its advances. Most retail funding sources have relatively shorter maturity. As on

March 31, 2011, the average tenures of its outstanding loans and borrowings were around six

years and five years, respectively.

Rs. Bn.

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

10.8%16.2%

16.0%

Bonds Banks, FI’s Capital gains bonds Foreign

57.0%

Page 71: Crisil oct11

7. Does the wholesale resource profile of REC add any risks to its business profile? How

does REC manage its asset-liability management (ALM) profile?While REC's resource profile is wholesale in nature, this does not add significant risks to its

business profile as REC is able to manage this well. REC's instruments have wide market

acceptability, as reflected in their diversified investor base with a long-term investment

horizon, including Life Insurance Corporation of India (LIC), pension funds, and gratuity funds.

Other investors include mutual funds, banks, and retail investors (for 54EC capital gains bonds,

and infrastructure bonds). This allows REC to borrow at low spreads over G-Secs. RECs

resource profile is also supported by its ability to raise low-cost funds through capital gains

bonds. Its cost of borrowing declined marginally to 7.7 per cent in 2010-11 from 7.8 per cent in

2009-10.

Table 2: REC's resource profile

Chart 6: Borrowing profile as on March 31, 2011

65

Amount % Amount % Amount %

Capital Gains bonds 113 16.2 99 17.8 144 32.0

Institutional Bonds 399 57.0 309 55.2 182 40.6

Banks, FI, CP etc 112 16.0 106 18.9 95 21.2

Foreign Currency 76 10.8 21 3.7 15 3.3

CP - - 25 4.4 13 2.9

Total 700 100.0 560 100.0 449 100.0

Borrowing Costs (%) 7.7 7.8 7.3

2011 2010 2009

As seen in Chart 6, bonds constituted around 57 per cent of REC's outstanding borrowings as

on March 31, 2011, and are usually subscribed to by long-term investors such as LIC, pension

and gratuity funds, and insurance companies. REC also has a sizeable proportion of retail

funding given that it raises low-cost capital gains bonds (around 16 per cent) under Section

54EC of Income Tax Act, 1961. REC's reliance on bank borrowings (around 16 per cent) is not

very high. Therefore, the dependence on banks, which are also lenders to the power sector, is

low.

Furthermore, during 2010-11, REC's resource profile was supported by the substantially

higher funds raised through foreign currency borrowings; REC raised Rs.57.0 billion in 2010-11

as against Rs.6.1 billion in 2009-10 through foreign currency borrowings. Accordingly, foreign

currency borrowings constituted about 11 per cent of REC's total borrowings as on March 31,

2011 (about 4 per cent as on March 31, 2010). Additionally, REC was granted infrastructure

financing non-banking finance company (NBFC-IFC) status in 2010-11. This has increased its

flexibility to raise more funds through foreign currency borrowings at lower costs (up to 50 per

cent of its net worth, subject to a limit of USD500 million per year under the automatic route

as compared to the approval route earlier) to manage its resource profile. REC has a policy of

hedging risks associated with foreign currency borrowings for a significant portion of such

borrowings, while the remaining portion is left unhedged and remains exposed to the risk of

depreciation. While REC has internal limits for such unhedged exposure, and regularly

monitors such positions, any adverse movement in foreign exchange or interest rates may

constrain the corporation's earnings, especially if the proportion of unhedged foreign

currency borrowings is high.

Additionally, upon being classified as an NBFC-IFC, banks' exposure limit to REC has increased

by 5 per cent of their capital funds. The risk weight for exposure to REC is linked to its credit

rating and is significantly lower; this is expected to translate into lower cost of funds through

bank borrowings.

REC's resource profile is likely to remain wholesale in nature as it needs to raise long-term

funds to ensure adequate matching of its assets and liabilities; this is primarily driven by the

long tenure of its advances. Most retail funding sources have relatively shorter maturity. As on

March 31, 2011, the average tenures of its outstanding loans and borrowings were around six

years and five years, respectively.

Rs. Bn.

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

10.8%16.2%

16.0%

Bonds Banks, FI’s Capital gains bonds Foreign

57.0%

Page 72: Crisil oct11

67

REC has a comfortable ALM profile, as reflected in its adequate negative mismatches. As on

March 31, 2011, on a principal-only basis, the cumulative negative mismatches in the

maturity buckets of up to March 31, 2012, were around 7 per cent of its cumulative outflows

up to the end of March 2012. REC's Asset Liability Management Committee continuously

monitors the ALM position and additional borrowings are done with the negative mismatches

under consideration. REC also prepares a quarterly cash flow statement to monitor liquidity.

Furthermore, the ALM position is supported by low reliance on short-term debt; short-term

debt constituted less than 5 per cent of the total borrowings during the past three years. REC

also maintains unutilised banks lines to cover for any short-term liquidity requirements in

maturity buckets of up to 45 days.

Since REC is notified as a public financial institution, it is currently exempted from compliance

with most of the prudential norms applicable to NBFCs. However, upon being classified as an

NBFC-IFC, REC's regulatory framework is gradually converging with those applicable to other

NBFC-IFCs. REC also has its own internal guidelines, many of which already comply with the

regulatory norms applicable to NBFCs, although not entirely (refer to Annexure II for details).

REC's regulatory dispensation differs from that of other financiers in the following aspects:l REC's exposure norms with respect to lending to SPUs are higher than those applicable to

NBFC-IFCs and banks; this allows REC to retain its sector focus. l REC's NPA recognition norms are less stringent than those of banks and NBFC-IFCs,

resulting in lower reported gross NPAs.l Standard asset provisioning is not applicable for REC.

REC is formulating a roadmap (in consultation with MoP) for submission to the Reserve Bank

of India (RBI) by March 31, 2012, setting out the manner in which it intends to comply with RBI

prudential norms. Additionally, RBI, in its various reports, has indicated that it is reexamining

the exemptions granted to government-owned NBFCs. Hence, many of the regulatory

concessions currently available to REC may be phased out gradually over the medium term.

Given REC's comfortable capitalisation and earnings profile, CRISIL believes that REC will

comply with the stringent regulatory norms applicable to NBFC-IFCs, barring exposure norms.

8. How does REC's regulatory dispensation differ from those of other financiers?

9. Will the capital position of REC be adequate to absorb shocks to its asset quality?REC has comfortable capitalisation with a net worth of Rs.127.9 billion as on March 31, 2011.

Its Tier I and overall CAR were at 18.04 per cent and 19.09 per cent, respectively, as on March

31, 2011. Being classified as NBFC-IFC, REC is required to maintain minimum Tier I and overall

CAR of 10 per cent and 15 per cent, respectively. Its gearing remains adequate, at around 5.5

times as on March 31, 2011 (5 times as on March 31, 2010). REC's capitalisation is supported

by healthy accruals to net worth as reflected in the three-year average return on net worth

ratio of 22.2 per cent. CRISIL believes that REC's accruals will remain comfortable over the

medium term, driven by its ability to maintain stable interest spreads. Furthermore, the

management intends to maintain a minimum Tier I CAR of around 17 per cent on a steady

state basis over the medium term.

Additionally, REC has flexibility to raise additional equity capital by diluting GoI's shareholding

(currently at around 66.8 per cent) to support its growth plans over the medium term; REC can

raise around Rs.52 billion through dilution of GoI holding to 51 per cent at current market

prices.

CRISIL has analysed the adequacy of capital under two scenarios (refer to CRISIL article 'Power

distribution utilities- current issues and what lies ahead’ for details), based on REC's asset

quality risks, taking into account the risk classification of REC's SPU exposures (refer to Chart 5)

and the expected stress on its private sector exposures.l In the base case, CRISIL assumed slippages of 10 per cent from the highest risk SPU

portfolio, 5 per cent from the high risk portfolio, and 5 per cent from the private sector

portfolio. l The stress scenario assumed slippages of 30 per cent from the highest risk SPU portfolio,

10 per cent from the high risk portfolio, and 10 per cent from the private sector portfolio.

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Page 73: Crisil oct11

67

REC has a comfortable ALM profile, as reflected in its adequate negative mismatches. As on

March 31, 2011, on a principal-only basis, the cumulative negative mismatches in the

maturity buckets of up to March 31, 2012, were around 7 per cent of its cumulative outflows

up to the end of March 2012. REC's Asset Liability Management Committee continuously

monitors the ALM position and additional borrowings are done with the negative mismatches

under consideration. REC also prepares a quarterly cash flow statement to monitor liquidity.

Furthermore, the ALM position is supported by low reliance on short-term debt; short-term

debt constituted less than 5 per cent of the total borrowings during the past three years. REC

also maintains unutilised banks lines to cover for any short-term liquidity requirements in

maturity buckets of up to 45 days.

Since REC is notified as a public financial institution, it is currently exempted from compliance

with most of the prudential norms applicable to NBFCs. However, upon being classified as an

NBFC-IFC, REC's regulatory framework is gradually converging with those applicable to other

NBFC-IFCs. REC also has its own internal guidelines, many of which already comply with the

regulatory norms applicable to NBFCs, although not entirely (refer to Annexure II for details).

REC's regulatory dispensation differs from that of other financiers in the following aspects:l REC's exposure norms with respect to lending to SPUs are higher than those applicable to

NBFC-IFCs and banks; this allows REC to retain its sector focus. l REC's NPA recognition norms are less stringent than those of banks and NBFC-IFCs,

resulting in lower reported gross NPAs.l Standard asset provisioning is not applicable for REC.

REC is formulating a roadmap (in consultation with MoP) for submission to the Reserve Bank

of India (RBI) by March 31, 2012, setting out the manner in which it intends to comply with RBI

prudential norms. Additionally, RBI, in its various reports, has indicated that it is reexamining

the exemptions granted to government-owned NBFCs. Hence, many of the regulatory

concessions currently available to REC may be phased out gradually over the medium term.

Given REC's comfortable capitalisation and earnings profile, CRISIL believes that REC will

comply with the stringent regulatory norms applicable to NBFC-IFCs, barring exposure norms.

8. How does REC's regulatory dispensation differ from those of other financiers?

9. Will the capital position of REC be adequate to absorb shocks to its asset quality?REC has comfortable capitalisation with a net worth of Rs.127.9 billion as on March 31, 2011.

Its Tier I and overall CAR were at 18.04 per cent and 19.09 per cent, respectively, as on March

31, 2011. Being classified as NBFC-IFC, REC is required to maintain minimum Tier I and overall

CAR of 10 per cent and 15 per cent, respectively. Its gearing remains adequate, at around 5.5

times as on March 31, 2011 (5 times as on March 31, 2010). REC's capitalisation is supported

by healthy accruals to net worth as reflected in the three-year average return on net worth

ratio of 22.2 per cent. CRISIL believes that REC's accruals will remain comfortable over the

medium term, driven by its ability to maintain stable interest spreads. Furthermore, the

management intends to maintain a minimum Tier I CAR of around 17 per cent on a steady

state basis over the medium term.

Additionally, REC has flexibility to raise additional equity capital by diluting GoI's shareholding

(currently at around 66.8 per cent) to support its growth plans over the medium term; REC can

raise around Rs.52 billion through dilution of GoI holding to 51 per cent at current market

prices.

CRISIL has analysed the adequacy of capital under two scenarios (refer to CRISIL article 'Power

distribution utilities- current issues and what lies ahead’ for details), based on REC's asset

quality risks, taking into account the risk classification of REC's SPU exposures (refer to Chart 5)

and the expected stress on its private sector exposures.l In the base case, CRISIL assumed slippages of 10 per cent from the highest risk SPU

portfolio, 5 per cent from the high risk portfolio, and 5 per cent from the private sector

portfolio. l The stress scenario assumed slippages of 30 per cent from the highest risk SPU portfolio,

10 per cent from the high risk portfolio, and 10 per cent from the private sector portfolio.

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Page 74: Crisil oct11

Table 3: Analysis of adequacy of capital to cover asset-side risks

As seen in the table above, under the base case scenario, REC is expected to manage the

increased asset quality challenges. Its net worth coverage for exposure at risk is adequate, at

about 3.3 times. However, under the stress case scenario, its net worth coverage for exposure

at risk is likely to be low, at around 1.3 times, and REC will require additional capital to maintain

adequate coverage for the increased NPAs.

REC has managed its profitability through interest rate cycles. Its net profitability margin 1(NPM ; on a yearly average basis) was 3.1 per cent in 2010-11 (2.9 per cent in the previous

year) and was driven by stable interest spreads (3.0 per cent in 2010-11 and 2009-10). REC's

profitability has also been supported by low operating expenses ratio (0.2 per cent in 2010-11

and 2009-10), unlike banks and NBFCs which have relatively higher operating expenses

because of their large branch network and employee costs.

Table 4: Net profitability margin trend

10 Will REC's profitability be under pressure in 2011-12, given the sharp increase in

borrowing costs over the past few months and increased competition from banks in this

lending space? What is the likely increase in provisioning requirement?

69

Base Case Scenario Stress Case Scenario

Exposure at Risk

-  Highest risk portfolio Rs. Bn. 22.9 68.7

-  High risk portfolio Rs. Bn. 11.8 23.6

-  Private sector Rs. Bn. 3.9 7.8

Total exposure at risk Rs. Bn. 38.6 100.1

Exposure at risk Per cent 4.7 12.3

Net worth as on March 31, 2011 Rs. Bn. 127.9 127.9

Net worth / Exposure at risk Times 3.3 1.3

For the year 2010-11 2009-10 2008-09 2007-08

Yield on funds deployed 10.7 10.8 10.1 9.3

Cost of Borrowings 7.7 7.8 7.3 6.4

Interest Spread 3.0 3.0 2.8 2.9

Fee Income 0.2 0.2 0.2 0.0

Operating Expenses 0.2 0.2 0.2 0.3

Net Profitability Margin (pre-credit costs) 3.1 2.9 2.8 2.7

REC's profitability is expected to remain comfortable in 2011-12 and its interest spreads are

likely to remain at current levels. While REC's borrowing costs may increase in 2011-12

because of hardening interest rates, its net interest spread is likely to remain comfortable,

given its ability to pass on a major part of the increase in borrowing costs in the form of higher

yields. REC's operating expenses ratio is also likely to remain at the current level, supporting its

earnings profile.

REC's profitability has improved in the past few years driven by its ability to maintain stable

interest spreads due to a three-year interest reset clause on its long-term loans. Furthermore,

REC is expected to maintain strong pricing power over the medium term given the large

financing requirements for the power sector.

Despite rising interest rate scenario, REC has been able to manage its borrowing costs

primarily because of the sizeable proportion of funds raised through external commercial

borrowings and capital gains bonds at relatively lower costs. Its cost of borrowings was around

7.7 per cent in 2010-11 (7.8 per cent for 2009-10). CRISIL believes that REC will continue to

benefit from its ability to maintain competitive borrowing costs driven by factors such as its

ability to raise large proportion of funds at relatively low costs, and wide market acceptability

for its instruments.

Competition from banks is unlikely to increase materially over the next few years. The

competition between banks and REC has not resulted in irrational pricing by either. The

differential in interest rates charged by banks and REC is usually between 25 and 50 basis

points.

While REC is currently exempt from standard assets provisioning requirements applicable for

NBFCs, its profits may reduce by less than 10 per cent (about Rs.2.5 billion) of the expected PAT

for 2011-12, if required to make provisions on the outstanding loans as on March 31, 2012.

Another risk to REC's earnings may arise from the unhedged portion of its foreign currency

borrowings.

CRISIL has also analysed the impact of potential increase in provisioning requirement on REC's

earnings profile arising from inherent asset quality challenges (refer to Table 5); REC had

exposure at risk of about Rs.38.6 billion (base case scenario) and Rs.100.1 billion (stress case

scenario) as on March 31, 2011. The analysis indicates that REC will maintain adequate

earnings profile even under stress conditions. 1 CRISIL uses NPM to analyse the core profitability of financing entities. NPM is defined as (Yield on funds deployed) - (Average

borrowing costs) - (Operating expense ratio) + (Fee income levels).

In per cent

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Table 3: Analysis of adequacy of capital to cover asset-side risks

As seen in the table above, under the base case scenario, REC is expected to manage the

increased asset quality challenges. Its net worth coverage for exposure at risk is adequate, at

about 3.3 times. However, under the stress case scenario, its net worth coverage for exposure

at risk is likely to be low, at around 1.3 times, and REC will require additional capital to maintain

adequate coverage for the increased NPAs.

REC has managed its profitability through interest rate cycles. Its net profitability margin 1(NPM ; on a yearly average basis) was 3.1 per cent in 2010-11 (2.9 per cent in the previous

year) and was driven by stable interest spreads (3.0 per cent in 2010-11 and 2009-10). REC's

profitability has also been supported by low operating expenses ratio (0.2 per cent in 2010-11

and 2009-10), unlike banks and NBFCs which have relatively higher operating expenses

because of their large branch network and employee costs.

Table 4: Net profitability margin trend

10 Will REC's profitability be under pressure in 2011-12, given the sharp increase in

borrowing costs over the past few months and increased competition from banks in this

lending space? What is the likely increase in provisioning requirement?

69

Base Case Scenario Stress Case Scenario

Exposure at Risk

-  Highest risk portfolio Rs. Bn. 22.9 68.7

-  High risk portfolio Rs. Bn. 11.8 23.6

-  Private sector Rs. Bn. 3.9 7.8

Total exposure at risk Rs. Bn. 38.6 100.1

Exposure at risk Per cent 4.7 12.3

Net worth as on March 31, 2011 Rs. Bn. 127.9 127.9

Net worth / Exposure at risk Times 3.3 1.3

For the year 2010-11 2009-10 2008-09 2007-08

Yield on funds deployed 10.7 10.8 10.1 9.3

Cost of Borrowings 7.7 7.8 7.3 6.4

Interest Spread 3.0 3.0 2.8 2.9

Fee Income 0.2 0.2 0.2 0.0

Operating Expenses 0.2 0.2 0.2 0.3

Net Profitability Margin (pre-credit costs) 3.1 2.9 2.8 2.7

REC's profitability is expected to remain comfortable in 2011-12 and its interest spreads are

likely to remain at current levels. While REC's borrowing costs may increase in 2011-12

because of hardening interest rates, its net interest spread is likely to remain comfortable,

given its ability to pass on a major part of the increase in borrowing costs in the form of higher

yields. REC's operating expenses ratio is also likely to remain at the current level, supporting its

earnings profile.

REC's profitability has improved in the past few years driven by its ability to maintain stable

interest spreads due to a three-year interest reset clause on its long-term loans. Furthermore,

REC is expected to maintain strong pricing power over the medium term given the large

financing requirements for the power sector.

Despite rising interest rate scenario, REC has been able to manage its borrowing costs

primarily because of the sizeable proportion of funds raised through external commercial

borrowings and capital gains bonds at relatively lower costs. Its cost of borrowings was around

7.7 per cent in 2010-11 (7.8 per cent for 2009-10). CRISIL believes that REC will continue to

benefit from its ability to maintain competitive borrowing costs driven by factors such as its

ability to raise large proportion of funds at relatively low costs, and wide market acceptability

for its instruments.

Competition from banks is unlikely to increase materially over the next few years. The

competition between banks and REC has not resulted in irrational pricing by either. The

differential in interest rates charged by banks and REC is usually between 25 and 50 basis

points.

While REC is currently exempt from standard assets provisioning requirements applicable for

NBFCs, its profits may reduce by less than 10 per cent (about Rs.2.5 billion) of the expected PAT

for 2011-12, if required to make provisions on the outstanding loans as on March 31, 2012.

Another risk to REC's earnings may arise from the unhedged portion of its foreign currency

borrowings.

CRISIL has also analysed the impact of potential increase in provisioning requirement on REC's

earnings profile arising from inherent asset quality challenges (refer to Table 5); REC had

exposure at risk of about Rs.38.6 billion (base case scenario) and Rs.100.1 billion (stress case

scenario) as on March 31, 2011. The analysis indicates that REC will maintain adequate

earnings profile even under stress conditions. 1 CRISIL uses NPM to analyse the core profitability of financing entities. NPM is defined as (Yield on funds deployed) - (Average

borrowing costs) - (Operating expense ratio) + (Fee income levels).

In per cent

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Page 76: Crisil oct11

Table 5: Earnings impact of asset quality pressure (in Rs. Billion)

71

Base Case Scenario Stress Case Scenario

Exposure at risk 38.6 100.1

Provisions @10% for exposure at risk 3.9 10

Revised PBT for 2010-11 30.9 24.8

Revised PAT for 2010-11 22.8 18.7

Decline in PAT for 2010-11 (per cent) 11% 27%

Revised RoA (per cent) 3.0% 2.5%

Annexure I: Break-up of RECs State-wise SPU exposures

REC's SPU Exposure in Rs. Billion

Maharashtra 126.0

Rajasthan 87.1

Tamil Nadu 80.1

Andhra Pradesh 78.8

Uttar Pradesh 59.6

Punjab 54.8

Haryana 48.7

West Bengal 22.7

Chhattisgarh 11.6

Karnataka 11.5

Jharkhand 6.9

Madhya Pradesh 6.3

Jammu& Kashmir 5.8

Bihar 4.6

Uttarakhand 4.4

Kerala 3.6

Himachal Pradesh 2.9

Meghalaya 2.9

Assam 1.8

Manipur 1.2

Gujarat 1.1

Orissa 1.1

Others 57.4

Total 680.9

SPU

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FAQs on Rural Electrification Corporation Limited

Page 77: Crisil oct11

Table 5: Earnings impact of asset quality pressure (in Rs. Billion)

71

Base Case Scenario Stress Case Scenario

Exposure at risk 38.6 100.1

Provisions @10% for exposure at risk 3.9 10

Revised PBT for 2010-11 30.9 24.8

Revised PAT for 2010-11 22.8 18.7

Decline in PAT for 2010-11 (per cent) 11% 27%

Revised RoA (per cent) 3.0% 2.5%

Annexure I: Break-up of RECs State-wise SPU exposures

REC's SPU Exposure in Rs. Billion

Maharashtra 126.0

Rajasthan 87.1

Tamil Nadu 80.1

Andhra Pradesh 78.8

Uttar Pradesh 59.6

Punjab 54.8

Haryana 48.7

West Bengal 22.7

Chhattisgarh 11.6

Karnataka 11.5

Jharkhand 6.9

Madhya Pradesh 6.3

Jammu& Kashmir 5.8

Bihar 4.6

Uttarakhand 4.4

Kerala 3.6

Himachal Pradesh 2.9

Meghalaya 2.9

Assam 1.8

Manipur 1.2

Gujarat 1.1

Orissa 1.1

Others 57.4

Total 680.9

SPU

Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Page 78: Crisil oct11

73Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Annexure II- Regulatory Framework for Banks, IFCs and REC

S. No Parameter Banks IFCs REC Comments

1 Exposure Limits

Lending to single borrower

20% of capital funds for infra exposures

25% of owned funds

i. 100% of net worth for non-integrated utilities* and where more than one distribution companies [DISCOMs] have been formed), or State Government/Central Government power sector PSUs ii. 200% of net worth for DISCOMs where there is only one DISCOM iii. 250% of net worth for integrated SPUs iv. 50% of net worth for Central/State/Joint sector borrower (other than that covered in i to iii above) v For private projects/utilities, REC follows RBI guidelines i.e. single and group borrower limit of 25% and 40%, respectively of owned funds.

Exposure norms for SPUs higher than that for IFCs and banks allows them to grow their book and maintain competitiveness. However, it also results in higher concentration risks.Lending to a single

group of borrowers40% of owned funds

2 NPA recognition

Days past due (dpd) NPA recognition at 90+ dpd

NPA recognition at 180+ dpd

NPA recognition at 180+ dpd. If banks' NPA recognition norms were followed, GNPA would be less than 0.5%

Facility wise / Borrower wise

Borrower wise (i.e. all the loans of the borrower are classified as NPAs)

Loans to state/central entities are considered loan/facility wise. Loans to private sector entities are considered borrower wise

Provisioning requirements

For NPAsSubstandard Doubtful (> 3 years)Loss

15%25% to 100%100%

10%20% to 50%100%

10%20% to 50%100%

No material impact because of low GNPA levels

For standard assets 0.40% of standard assets (other than CRE, agri, SME, teaser loans)

0.25% of standard assets (w.e.f. March 2012)

Currently not applicable Profits (before tax) is expected to be lower by about Rs.2.5 Billion (< 10%) for 2011-12

4 Capital adequacy

Tier I CAR 6% 10% 10% No impact

Overall CAR 9% 15% 15% No impact

Risk weights Rating wise 100% 100% (except for state govt guaranteed exposures which carry 20%)

Existing norms in line with that applicable for NBFCs

5 Asset Liability Management

Limit on negative mismatches upto 30 days (as % of the cash outflows in the respective time buckets)

Next day 5%2-7 days 10%8-14 days 15%15-28 days 20%

1 to 30/31 days time-bucket should not exceed 15 % of outflows of each time-bucket and the cumulative gap upto 1 year period should not exceed 15% of the cumulative cash outflows upto 1 year.

REC's Asset Liability Management Committee continuously monitors the ALM position and additional borrowings are done with the mismatches under consideration. As on March 31, 2011, on a principal-only basis, the cumulative negative mismatches in the maturity buckets up to 1 year were around 7% of its cumulative outflows up to 1 year.

While there is no regulatory ALM limits, ALM position is comfortable with manageable level of mismatches and low dependence on ST borrowings

3

50% of capital funds forinfra exposures

*SPUs where generation, transmission and distribution functions have been trifurcated into separate companies

Page 79: Crisil oct11

73Power Sector Lenders: Will the credit quality trip?

FAQs on Rural Electrification Corporation Limited

Annexure II- Regulatory Framework for Banks, IFCs and REC

S. No Parameter Banks IFCs REC Comments

1 Exposure Limits

Lending to single borrower

20% of capital funds for infra exposures

25% of owned funds

i. 100% of net worth for non-integrated utilities* and where more than one distribution companies [DISCOMs] have been formed), or State Government/Central Government power sector PSUs ii. 200% of net worth for DISCOMs where there is only one DISCOM iii. 250% of net worth for integrated SPUs iv. 50% of net worth for Central/State/Joint sector borrower (other than that covered in i to iii above) v For private projects/utilities, REC follows RBI guidelines i.e. single and group borrower limit of 25% and 40%, respectively of owned funds.

Exposure norms for SPUs higher than that for IFCs and banks allows them to grow their book and maintain competitiveness. However, it also results in higher concentration risks.Lending to a single

group of borrowers40% of owned funds

2 NPA recognition

Days past due (dpd) NPA recognition at 90+ dpd

NPA recognition at 180+ dpd

NPA recognition at 180+ dpd. If banks' NPA recognition norms were followed, GNPA would be less than 0.5%

Facility wise / Borrower wise

Borrower wise (i.e. all the loans of the borrower are classified as NPAs)

Loans to state/central entities are considered loan/facility wise. Loans to private sector entities are considered borrower wise

Provisioning requirements

For NPAsSubstandard Doubtful (> 3 years)Loss

15%25% to 100%100%

10%20% to 50%100%

10%20% to 50%100%

No material impact because of low GNPA levels

For standard assets 0.40% of standard assets (other than CRE, agri, SME, teaser loans)

0.25% of standard assets (w.e.f. March 2012)

Currently not applicable Profits (before tax) is expected to be lower by about Rs.2.5 Billion (< 10%) for 2011-12

4 Capital adequacy

Tier I CAR 6% 10% 10% No impact

Overall CAR 9% 15% 15% No impact

Risk weights Rating wise 100% 100% (except for state govt guaranteed exposures which carry 20%)

Existing norms in line with that applicable for NBFCs

5 Asset Liability Management

Limit on negative mismatches upto 30 days (as % of the cash outflows in the respective time buckets)

Next day 5%2-7 days 10%8-14 days 15%15-28 days 20%

1 to 30/31 days time-bucket should not exceed 15 % of outflows of each time-bucket and the cumulative gap upto 1 year period should not exceed 15% of the cumulative cash outflows upto 1 year.

REC's Asset Liability Management Committee continuously monitors the ALM position and additional borrowings are done with the mismatches under consideration. As on March 31, 2011, on a principal-only basis, the cumulative negative mismatches in the maturity buckets up to 1 year were around 7% of its cumulative outflows up to 1 year.

While there is no regulatory ALM limits, ALM position is comfortable with manageable level of mismatches and low dependence on ST borrowings

3

50% of capital funds forinfra exposures

*SPUs where generation, transmission and distribution functions have been trifurcated into separate companies

Page 80: Crisil oct11

75Power Sector Lenders: Will the credit quality trip?

List of Rated Entities in the Power Sector

Segment Company Name

1 Power Generation Companies Aban Power Company Limited

2 Power Generation Companies Adani Power Limited

3 Power Generation Companies Adani Power Maharashtra Limited

4 Power Generation Companies Adani Power Rajasthan Limited

5 Power Generation Companies Aglar Power Limited

6 Power Generation Companies Amrit Bio-Energy & Industries Limited

7 Power Generation Companies Amrit Environmental Technologies Private Limited

8 Power Generation Companies Andhra Pradesh Power Generation Corporation Limited

9 Power Generation Companies Atria Brindavan Power Limited

10 Power Generation Companies Atria Power Corporation Limited

11 Power Generation Companies B L A Power Private Limited

12 Power Generation Companies Cauvery Hydro Energy Ltd.

13 Power Generation Companies Chhattisgarh Steel & Power Limited

14 Power Generation Companies Coastal Gujarat Power Limited

15 Power Generation Companies Damodar Valley Corporation

16 Power Generation Companies ETA Power Gen Private Limited

17 Power Generation Companies Gadhia Solar Energy Systems Private Limited

18 Power Generation Companies Ginni Global Pvt. Ltd.

19 Power Generation Companies Greenko Energies Private Limited

20 Power Generation Companies Gujarat Paguthan Energy Corporation Pvt. Ltd.

21 Power Generation Companies Haryana Power Generation Corporation Limited

22 Power Generation Companies Hul Hydro Power Private Limited

23 Power Generation Companies iEnergy Wind Farms (Theni) Private Limited

24 Power Generation Companies Jala Shakti Limited

25 Power Generation Companies Jhajjar Power Limited

26 Power Generation Companies Junagadh Power Projects Private Limited

27 Power Generation Companies Kaveri Gas Power Limited

28 Power Generation Companies Konaseema Gas Power Limited

29 Power Generation Companies Krishna Godavari Power Utilities Limited

30 Power Generation Companies Lanco Anpara Power Limited

31 Power Generation Companies Lanco Budhil Hydro Power Private Limited

32 Power Generation Companies Lanco Kondapalli Power Limited

33 Power Generation Companies Lanco Mandakini Hydro Energy Pvt. Ltd.

34 Power Generation Companies Lanco Power Limited

35 Power Generation Companies Lanco Teesta Hydro Power Private Limited

36 Power Generation Companies Lanco Vidarbha Thermal Power Limited

37 Power Generation Companies Malaxmi Wind Power

38 Power Generation Companies MMS Steel & Power Private Limited

39 Power Generation Companies Nagarjuna Hydro Energy Private Limited

40 Power Generation Companies Narayanpur Power Company Private Limited

41 Power Generation Companies Nava Bharat Ventures Limited.

42 Power Generation Companies Neyveli Lignite Corporation Limited

43 Power Generation Companies NHPC Limited

44 Power Generation Companies NTPC Limited

45 Power Generation Companies NTPC-SAIL Power Company Private Limited

A knowledge sharing endeavour from CRISIL

Insights

Page 81: Crisil oct11

75Power Sector Lenders: Will the credit quality trip?

List of Rated Entities in the Power Sector

Segment Company Name

1 Power Generation Companies Aban Power Company Limited

2 Power Generation Companies Adani Power Limited

3 Power Generation Companies Adani Power Maharashtra Limited

4 Power Generation Companies Adani Power Rajasthan Limited

5 Power Generation Companies Aglar Power Limited

6 Power Generation Companies Amrit Bio-Energy & Industries Limited

7 Power Generation Companies Amrit Environmental Technologies Private Limited

8 Power Generation Companies Andhra Pradesh Power Generation Corporation Limited

9 Power Generation Companies Atria Brindavan Power Limited

10 Power Generation Companies Atria Power Corporation Limited

11 Power Generation Companies B L A Power Private Limited

12 Power Generation Companies Cauvery Hydro Energy Ltd.

13 Power Generation Companies Chhattisgarh Steel & Power Limited

14 Power Generation Companies Coastal Gujarat Power Limited

15 Power Generation Companies Damodar Valley Corporation

16 Power Generation Companies ETA Power Gen Private Limited

17 Power Generation Companies Gadhia Solar Energy Systems Private Limited

18 Power Generation Companies Ginni Global Pvt. Ltd.

19 Power Generation Companies Greenko Energies Private Limited

20 Power Generation Companies Gujarat Paguthan Energy Corporation Pvt. Ltd.

21 Power Generation Companies Haryana Power Generation Corporation Limited

22 Power Generation Companies Hul Hydro Power Private Limited

23 Power Generation Companies iEnergy Wind Farms (Theni) Private Limited

24 Power Generation Companies Jala Shakti Limited

25 Power Generation Companies Jhajjar Power Limited

26 Power Generation Companies Junagadh Power Projects Private Limited

27 Power Generation Companies Kaveri Gas Power Limited

28 Power Generation Companies Konaseema Gas Power Limited

29 Power Generation Companies Krishna Godavari Power Utilities Limited

30 Power Generation Companies Lanco Anpara Power Limited

31 Power Generation Companies Lanco Budhil Hydro Power Private Limited

32 Power Generation Companies Lanco Kondapalli Power Limited

33 Power Generation Companies Lanco Mandakini Hydro Energy Pvt. Ltd.

34 Power Generation Companies Lanco Power Limited

35 Power Generation Companies Lanco Teesta Hydro Power Private Limited

36 Power Generation Companies Lanco Vidarbha Thermal Power Limited

37 Power Generation Companies Malaxmi Wind Power

38 Power Generation Companies MMS Steel & Power Private Limited

39 Power Generation Companies Nagarjuna Hydro Energy Private Limited

40 Power Generation Companies Narayanpur Power Company Private Limited

41 Power Generation Companies Nava Bharat Ventures Limited.

42 Power Generation Companies Neyveli Lignite Corporation Limited

43 Power Generation Companies NHPC Limited

44 Power Generation Companies NTPC Limited

45 Power Generation Companies NTPC-SAIL Power Company Private Limited

A knowledge sharing endeavour from CRISIL

Insights

Page 82: Crisil oct11

77Power Sector Lenders: Will the credit quality trip?

List of Rated Entities in the Power Sector

46 Power Generation Companies Nuclear Power Corporation of India Limited

47 Power Generation Companies P & R Engineering Services Private Limited

48 Power Generation Companies P & R Gogripur Hydro Power Private Limited

49 Power Generation Companies Paschim Hydro Energy Private Limited

50 Power Generation Companies Prasanna Power Limited

51 Power Generation Companies Prathyusha Power Gen Private Limited

52 Power Generation Companies R. R. Energy Limited

53 Power Generation Companies Ravikiran Power Projects (Pvt) Limited

54 Power Generation Companies Reliance Utilities and Power Private Limited

55 Power Generation Companies Rukmani Power and Steel Limited

56 Power Generation Companies Sai Spurthi Power Private Limited

57 Power Generation Companies Sambhav Energy Limited

58 Power Generation Companies Satyamaharshi Power Corporation Limited

59 Power Generation Companies Shiv Renewable Energy Private Limited

60 Power Generation Companies Shravana Power Projects Pvt. Ltd.

61 Power Generation Companies Shree Maheshwar Hydel Power Corporation Ltd.

62 Power Generation Companies Simran Wind Project Private Limited

63 Power Generation Companies Sitapuram Power Limited

64 Power Generation Companies SMS Vidhyut Private Limited

65 Power Generation Companies Sodhi Brothers Hydro Power Private Limited

66 Power Generation Companies Srinivasa Gayithri Resource Recovery Limited

67 Power Generation Companies ST-CMS Electric Company Pvt. Ltd.

68 Power Generation Companies Sterlite Energy Limited

69 Power Generation Companies Sterlite Energy Limited

70 Power Generation Companies Suryachambal Power Limited

71 Power Generation Companies SV Power Private Limited

72 Power Generation Companies Swasti Power Limited

73 Power Generation Companies Talwandi Sabo Power Limited

74 Power Generation Companies Tangling Mini Hydel Power Project

75 Power Generation Companies TCP Limited

76 Power Generation Companies The West Bengal Power Development Corporation Limited

77 Power Generation Companies Torrent Energy Limited

78 Power Generation Companies Trinethra Energy Convertions Limited

79 Power Generation Companies Tungabhadra Power Company Pvt Ltd.

80 Power Generation Companies Udupi Power Corporation Ltd

81 Power Generation Companies Vamshi Hydro Energies Private Limited

82 Power Generation Companies Vamshi Industrial Power Limited

83 Power Generation Companies Vayunandana Power Limited

84 Power Generation Companies Viyyat Power Pvt. Ltd.

85 Power Transmission Companies Delhi Transco Limited

86 Power Transmission Companies East North Interconnection Company Limited

87 Power Transmission Companies Haryana Vidyut Prasaran Nigam Limited

88 Power Transmission Companies Karnataka Power Transmission Corporation Limited

89 Power Transmission Companies Power Grid Corporation of India Limited

90 Power Transmission Companies Powerlinks Transmission Limited

91 Power Transmission Companies Torrent Power Grid Limited

92 Power Transmission Companies Transmission Corporation of Andhra Pradesh Limited

93 Power Distribution Companies Eastern Power Distribution Company of Andhra Pradesh Limited

94 Power Distribution Companies Hubli Electricity Supply Company Ltd

95 Power Distribution Companies Northern Power Distribution Company of Andhra Pradesh Limited

96 Power Distribution Companies Reliance Infrastructure Limited

97 Power Distribution Companies Southern Power Distribution Company of Andhra Pradesh Limited

98 Power Distribution Companies Torrent Power Limited

99 Power Trading Companies National Energy Trading and Services Limited

100 Power Trading Companies NTPC Vidyut Vyapar Nigam Limited

101 Power Trading Companies PTC India Ltd

102 Integrated Power Utilities Gujarat Urja Vikas Nigam Limited

103 Integrated Power Utilities Tamil Nadu Electricity Board

104 Integrated Power Utilities Tamilnadu Generation and Distribution Corporation Limited

105 Integrated Power Utilities The Tata Power Company Limited

106 EPC and Other Services EDAC Engineering Limited

107 EPC and Other Services Flovel Energy Private Limited

108 EPC and Other Services Hythro Power Corporation Limited

109 EPC and Other Services KMG A to Z Systems Private Limited

110 EPC and Other Services Lanco Infratech Limited

111 EPC and Other Services Leena Power-Tech Engineers Private Limited

112 EPC and Other Services Pavani Controls & Panels Limited

113 EPC and Other Services Power Mech Projects Limited

114 EPC and Other Services Siddhartha Engineering Limited

115 EPC and Other Services Sigma Construction

116 EPC and Other Services Tata BP Solar India Limited

117 EPC and Other Services Techno Electric & Engg Co Ltd

118 EPC and Other Services Vasavi Power Services Private Limited

119 EPC and Other Services Venus Controls & Switchgear Pvt. Ltd.

120 Power Equipment Manufacturers ABB Limited

121 Power Equipment Manufacturers Aditya Vidyut Appliances Limited

122 Power Equipment Manufacturers Alfa Transformers Limited

123 Power Equipment Manufacturers Ashok Transformers Pvt Ltd

124 Power Equipment Manufacturers Ashoka Pre-Con Private Limited

125 Power Equipment Manufacturers Atlanta Electricals Private Limited

126 Power Equipment Manufacturers Belliss India Ltd.

127 Power Equipment Manufacturers Bharat Heavy Electricals Limited

128 Power Equipment Manufacturers DF Power Systems Pvt. Limited

129 Power Equipment Manufacturers Diamond Power Infrastructure Limited

130 Power Equipment Manufacturers HPC Electricals Limited

131 Power Equipment Manufacturers Inox Wind Limited

132 Power Equipment Manufacturers Kalpataru Power Transmission Ltd

133 Power Equipment Manufacturers Kamath Transformers Private Limited

134 Power Equipment Manufacturers Kanyaka Parameshwari Engineering Ltd

135 Power Equipment Manufacturers Keshav Electricals Private Limited

136 Power Equipment Manufacturers Kintech Synergy Private Limited

Segment Company Name Segment Company Name

Page 83: Crisil oct11

77Power Sector Lenders: Will the credit quality trip?

List of Rated Entities in the Power Sector

46 Power Generation Companies Nuclear Power Corporation of India Limited

47 Power Generation Companies P & R Engineering Services Private Limited

48 Power Generation Companies P & R Gogripur Hydro Power Private Limited

49 Power Generation Companies Paschim Hydro Energy Private Limited

50 Power Generation Companies Prasanna Power Limited

51 Power Generation Companies Prathyusha Power Gen Private Limited

52 Power Generation Companies R. R. Energy Limited

53 Power Generation Companies Ravikiran Power Projects (Pvt) Limited

54 Power Generation Companies Reliance Utilities and Power Private Limited

55 Power Generation Companies Rukmani Power and Steel Limited

56 Power Generation Companies Sai Spurthi Power Private Limited

57 Power Generation Companies Sambhav Energy Limited

58 Power Generation Companies Satyamaharshi Power Corporation Limited

59 Power Generation Companies Shiv Renewable Energy Private Limited

60 Power Generation Companies Shravana Power Projects Pvt. Ltd.

61 Power Generation Companies Shree Maheshwar Hydel Power Corporation Ltd.

62 Power Generation Companies Simran Wind Project Private Limited

63 Power Generation Companies Sitapuram Power Limited

64 Power Generation Companies SMS Vidhyut Private Limited

65 Power Generation Companies Sodhi Brothers Hydro Power Private Limited

66 Power Generation Companies Srinivasa Gayithri Resource Recovery Limited

67 Power Generation Companies ST-CMS Electric Company Pvt. Ltd.

68 Power Generation Companies Sterlite Energy Limited

69 Power Generation Companies Sterlite Energy Limited

70 Power Generation Companies Suryachambal Power Limited

71 Power Generation Companies SV Power Private Limited

72 Power Generation Companies Swasti Power Limited

73 Power Generation Companies Talwandi Sabo Power Limited

74 Power Generation Companies Tangling Mini Hydel Power Project

75 Power Generation Companies TCP Limited

76 Power Generation Companies The West Bengal Power Development Corporation Limited

77 Power Generation Companies Torrent Energy Limited

78 Power Generation Companies Trinethra Energy Convertions Limited

79 Power Generation Companies Tungabhadra Power Company Pvt Ltd.

80 Power Generation Companies Udupi Power Corporation Ltd

81 Power Generation Companies Vamshi Hydro Energies Private Limited

82 Power Generation Companies Vamshi Industrial Power Limited

83 Power Generation Companies Vayunandana Power Limited

84 Power Generation Companies Viyyat Power Pvt. Ltd.

85 Power Transmission Companies Delhi Transco Limited

86 Power Transmission Companies East North Interconnection Company Limited

87 Power Transmission Companies Haryana Vidyut Prasaran Nigam Limited

88 Power Transmission Companies Karnataka Power Transmission Corporation Limited

89 Power Transmission Companies Power Grid Corporation of India Limited

90 Power Transmission Companies Powerlinks Transmission Limited

91 Power Transmission Companies Torrent Power Grid Limited

92 Power Transmission Companies Transmission Corporation of Andhra Pradesh Limited

93 Power Distribution Companies Eastern Power Distribution Company of Andhra Pradesh Limited

94 Power Distribution Companies Hubli Electricity Supply Company Ltd

95 Power Distribution Companies Northern Power Distribution Company of Andhra Pradesh Limited

96 Power Distribution Companies Reliance Infrastructure Limited

97 Power Distribution Companies Southern Power Distribution Company of Andhra Pradesh Limited

98 Power Distribution Companies Torrent Power Limited

99 Power Trading Companies National Energy Trading and Services Limited

100 Power Trading Companies NTPC Vidyut Vyapar Nigam Limited

101 Power Trading Companies PTC India Ltd

102 Integrated Power Utilities Gujarat Urja Vikas Nigam Limited

103 Integrated Power Utilities Tamil Nadu Electricity Board

104 Integrated Power Utilities Tamilnadu Generation and Distribution Corporation Limited

105 Integrated Power Utilities The Tata Power Company Limited

106 EPC and Other Services EDAC Engineering Limited

107 EPC and Other Services Flovel Energy Private Limited

108 EPC and Other Services Hythro Power Corporation Limited

109 EPC and Other Services KMG A to Z Systems Private Limited

110 EPC and Other Services Lanco Infratech Limited

111 EPC and Other Services Leena Power-Tech Engineers Private Limited

112 EPC and Other Services Pavani Controls & Panels Limited

113 EPC and Other Services Power Mech Projects Limited

114 EPC and Other Services Siddhartha Engineering Limited

115 EPC and Other Services Sigma Construction

116 EPC and Other Services Tata BP Solar India Limited

117 EPC and Other Services Techno Electric & Engg Co Ltd

118 EPC and Other Services Vasavi Power Services Private Limited

119 EPC and Other Services Venus Controls & Switchgear Pvt. Ltd.

120 Power Equipment Manufacturers ABB Limited

121 Power Equipment Manufacturers Aditya Vidyut Appliances Limited

122 Power Equipment Manufacturers Alfa Transformers Limited

123 Power Equipment Manufacturers Ashok Transformers Pvt Ltd

124 Power Equipment Manufacturers Ashoka Pre-Con Private Limited

125 Power Equipment Manufacturers Atlanta Electricals Private Limited

126 Power Equipment Manufacturers Belliss India Ltd.

127 Power Equipment Manufacturers Bharat Heavy Electricals Limited

128 Power Equipment Manufacturers DF Power Systems Pvt. Limited

129 Power Equipment Manufacturers Diamond Power Infrastructure Limited

130 Power Equipment Manufacturers HPC Electricals Limited

131 Power Equipment Manufacturers Inox Wind Limited

132 Power Equipment Manufacturers Kalpataru Power Transmission Ltd

133 Power Equipment Manufacturers Kamath Transformers Private Limited

134 Power Equipment Manufacturers Kanyaka Parameshwari Engineering Ltd

135 Power Equipment Manufacturers Keshav Electricals Private Limited

136 Power Equipment Manufacturers Kintech Synergy Private Limited

Segment Company Name Segment Company Name

Page 84: Crisil oct11

137 Power Equipment Manufacturers L&T-MHI Turbine Generators Private Limited

138 Power Equipment Manufacturers Mahalaxmi Investment And Trading Pvt Ltd

139 Power Equipment Manufacturers Marson's Electrical Industries

140 Power Equipment Manufacturers Mehru Electrical And Mechanical Engineers Private Limited

141 Power Equipment Manufacturers Modern Transformers Private Limited

142 Power Equipment Manufacturers Nucon Power Controls Pvt. Ltd.

143 Power Equipment Manufacturers Nucon Switchgears Pvt. Ltd.

144 Power Equipment Manufacturers Pan-Electro Technic Enterprises Private Limited

145 Power Equipment Manufacturers Pioneer Wincon (P) Ltd.

146 Power Equipment Manufacturers Powergear Limited

147 Power Equipment Manufacturers Ramkrishna Electricals Limited

148 Power Equipment Manufacturers RTS Power Corporation Ltd.

149 Power Equipment Manufacturers Shreem Electric Limited

150 Power Equipment Manufacturers Shri Ram Switchgears Private Limited

151 Power Equipment Manufacturers Siemens Limited

152 Power Equipment Manufacturers Skipper Electricals (India) Limited

153 Power Equipment Manufacturers Star Delta Transformers Limited

154 Power Equipment Manufacturers Svasca Industries (India) Ltd.

155 Power Equipment Manufacturers Swastik Copper Private Limited

156 Power Equipment Manufacturers Tarapur Transformers Ltd.

157 Power Equipment Manufacturers TD Power Systems Limited

158 Power Equipment Manufacturers Tesla Transformers Ltd.

159 Power Equipment Manufacturers Uttam (Bharat) Electricals Private Limited

160 Power Equipment Manufacturers Venkateswara Electrical Industries Private Limited

161 Power Equipment Manufacturers Victrans Engineers

162 Power Equipment Manufacturers Vijai Electricals Limited

163 Power Equipment Manufacturers Vikas Enterprises

164 Power Cables and Conductors Manufacturers Ajit Solar Private Limited

165 Power Cables and Conductors Manufacturers Cabcon India Pvt Ltd.

166 Power Cables and Conductors Manufacturers Central Cables Limited

167 Power Cables and Conductors Manufacturers Electro Teknica Switchgears Pvt. Ltd.

168 Power Cables and Conductors Manufacturers Elymer Electrics Private Limited

169 Power Cables and Conductors Manufacturers Elymer International Private Limited

170 Power Cables and Conductors Manufacturers Essar Ferro Alloys Company

171 Power Cables and Conductors Manufacturers Finolex Cables Limited

172 Power Cables and Conductors Manufacturers Galaxy Concab (India) Private Limited

173 Power Cables and Conductors Manufacturers Gloster Cables Limited

174 Power Cables and Conductors Manufacturers Gupta Power Infrastructure Limited

175 Power Cables and Conductors Manufacturers Krishna Electrical Industries Ltd.

176 Power Cables and Conductors Manufacturers L&T Special Steels and Heavy Forging Private Limited

177 Power Cables and Conductors Manufacturers Laser Cables Pvt Ltd.

178 Power Cables and Conductors Manufacturers Lotus Powergear Private Limited

179 Power Cables and Conductors Manufacturers Lumino Industries Limited

180 Power Cables and Conductors Manufacturers NECCON POWER & INFRA LIMITED

181 Power Cables and Conductors Manufacturers Oswal Cables Private Limited

182 Power Cables and Conductors Manufacturers Phoenix Transmission Products Private Limited

79Power Sector Lenders: Will the credit quality trip?

List of Rated Entities in the Power Sector

183 Power Cables and Conductors Manufacturers Prem Conductors Private Limited

184 Power Cables and Conductors Manufacturers Ramelex Private Limited

185 Power Cables and Conductors Manufacturers Ravin Cables Limited

186 Power Cables and Conductors Manufacturers Sharavathy Conductors Private Limited

187 Power Cables and Conductors Manufacturers Signet Conductors Pvt Ltd

188 Power Cables and Conductors Manufacturers Simms Engineering Private Limited

189 Power Cables and Conductors Manufacturers Spandana Copper Conductors

190 Power Cables and Conductors Manufacturers Sri Gopikrishna Infrastructure Pvt Ltd

191 Power Cables and Conductors Manufacturers Sterlite Technologies Limited

192 Power Cables and Conductors Manufacturers Yash Ceramics Private Limited

Segment Company Name Segment Company Name

Page 85: Crisil oct11

137 Power Equipment Manufacturers L&T-MHI Turbine Generators Private Limited

138 Power Equipment Manufacturers Mahalaxmi Investment And Trading Pvt Ltd

139 Power Equipment Manufacturers Marson's Electrical Industries

140 Power Equipment Manufacturers Mehru Electrical And Mechanical Engineers Private Limited

141 Power Equipment Manufacturers Modern Transformers Private Limited

142 Power Equipment Manufacturers Nucon Power Controls Pvt. Ltd.

143 Power Equipment Manufacturers Nucon Switchgears Pvt. Ltd.

144 Power Equipment Manufacturers Pan-Electro Technic Enterprises Private Limited

145 Power Equipment Manufacturers Pioneer Wincon (P) Ltd.

146 Power Equipment Manufacturers Powergear Limited

147 Power Equipment Manufacturers Ramkrishna Electricals Limited

148 Power Equipment Manufacturers RTS Power Corporation Ltd.

149 Power Equipment Manufacturers Shreem Electric Limited

150 Power Equipment Manufacturers Shri Ram Switchgears Private Limited

151 Power Equipment Manufacturers Siemens Limited

152 Power Equipment Manufacturers Skipper Electricals (India) Limited

153 Power Equipment Manufacturers Star Delta Transformers Limited

154 Power Equipment Manufacturers Svasca Industries (India) Ltd.

155 Power Equipment Manufacturers Swastik Copper Private Limited

156 Power Equipment Manufacturers Tarapur Transformers Ltd.

157 Power Equipment Manufacturers TD Power Systems Limited

158 Power Equipment Manufacturers Tesla Transformers Ltd.

159 Power Equipment Manufacturers Uttam (Bharat) Electricals Private Limited

160 Power Equipment Manufacturers Venkateswara Electrical Industries Private Limited

161 Power Equipment Manufacturers Victrans Engineers

162 Power Equipment Manufacturers Vijai Electricals Limited

163 Power Equipment Manufacturers Vikas Enterprises

164 Power Cables and Conductors Manufacturers Ajit Solar Private Limited

165 Power Cables and Conductors Manufacturers Cabcon India Pvt Ltd.

166 Power Cables and Conductors Manufacturers Central Cables Limited

167 Power Cables and Conductors Manufacturers Electro Teknica Switchgears Pvt. Ltd.

168 Power Cables and Conductors Manufacturers Elymer Electrics Private Limited

169 Power Cables and Conductors Manufacturers Elymer International Private Limited

170 Power Cables and Conductors Manufacturers Essar Ferro Alloys Company

171 Power Cables and Conductors Manufacturers Finolex Cables Limited

172 Power Cables and Conductors Manufacturers Galaxy Concab (India) Private Limited

173 Power Cables and Conductors Manufacturers Gloster Cables Limited

174 Power Cables and Conductors Manufacturers Gupta Power Infrastructure Limited

175 Power Cables and Conductors Manufacturers Krishna Electrical Industries Ltd.

176 Power Cables and Conductors Manufacturers L&T Special Steels and Heavy Forging Private Limited

177 Power Cables and Conductors Manufacturers Laser Cables Pvt Ltd.

178 Power Cables and Conductors Manufacturers Lotus Powergear Private Limited

179 Power Cables and Conductors Manufacturers Lumino Industries Limited

180 Power Cables and Conductors Manufacturers NECCON POWER & INFRA LIMITED

181 Power Cables and Conductors Manufacturers Oswal Cables Private Limited

182 Power Cables and Conductors Manufacturers Phoenix Transmission Products Private Limited

79Power Sector Lenders: Will the credit quality trip?

List of Rated Entities in the Power Sector

183 Power Cables and Conductors Manufacturers Prem Conductors Private Limited

184 Power Cables and Conductors Manufacturers Ramelex Private Limited

185 Power Cables and Conductors Manufacturers Ravin Cables Limited

186 Power Cables and Conductors Manufacturers Sharavathy Conductors Private Limited

187 Power Cables and Conductors Manufacturers Signet Conductors Pvt Ltd

188 Power Cables and Conductors Manufacturers Simms Engineering Private Limited

189 Power Cables and Conductors Manufacturers Spandana Copper Conductors

190 Power Cables and Conductors Manufacturers Sri Gopikrishna Infrastructure Pvt Ltd

191 Power Cables and Conductors Manufacturers Sterlite Technologies Limited

192 Power Cables and Conductors Manufacturers Yash Ceramics Private Limited

Segment Company Name Segment Company Name

Page 86: Crisil oct11

Notes

Page 87: Crisil oct11
Page 88: Crisil oct11

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