PSU bank stocks struggle as power NPA crisis deepens

Although the Allahabad High Court's order does not provide direct respite to independent power producers who are at the brink of facing insolvency proceeding, it does provide government and RBI an opportunity to stop a rush of stressed assets heading to NCLT. The court seeks proactive action from the government and the central bank to resolve these stressed power assets under Section 7 of the RBI Act and deal with the NPAs in the next 15 days. This Act empowers a government appointed board to give directions to the RBI in public interest.

India has an insurmountable need for electricity to deal with this power hungry government engaged private companies for providing energy infrastructure. But due to preferential treatment given to state run utilities these independent power producers with huge capex turned NPAs. The biggest blow came from Coal India's inabilities to provide fuel for these projects which are predominantly thermal power plants. Other reasons include delay in land acquisition and environment clearance, coupled with non-payment of dues by state electricity boards and the state government's backtracking from power purchase agreements causing huge losses to independent power producers.

Due to these reasons, the power companies argue that the sector's NPAs should not be dealt as wilful defaults. Generally, these power projects have low investor interest and banks are expected to take a haircut of 50-70 per cent to resolve these cases. Although, there are buyers willing to invest in this stressed assets including the power companies looking for expansion, private equity firms and asset restructuring companies but they are interested at buying at a discount which is harmful for the bank's balance sheet.

Approximately 60,000 to 65,000 MW capacity in the private power sector is stressed with banks having an exposure of Rs. 3 lakh crore to them. Of these, Rs. 1.7 lakh crore of debt held in 34 coal-based thermal power plants are classified as NPAs.

Reacting to these developments, PSBs banks were struggling during Tuesday's trading session. Among PSB stocks leading the losers pack were Bank of Baroda and Union Bank which were down by more than 3 per cent, while Bank of India, Canara Bank, Oriental Bank were down more than 2 per cent, whereas PNB, Andhra Bank, Syndicate Bank and Indian Bank were down by around 1 per cent on Tuesday.

Private Bank losers was led by Yes Bank down close to 3 per cent, while RBL, Axis Bank and ICICI Bank were down by 1.27, 0.90 and 0.74 per cent, respectively.

Among indices, Nifty Bank was at 28,213.45, down 50.75 points or 0.18 per cent, while Nifty PSU Bank was at down by 1.03 and Nifty PVT Bank was down by 0.17 per cent on Tuesday lunch hours. While BSE Bankex was at 31,883.86, down by 0.28 per cent. On the other hand, the benchmark index Nifty50 was at 11,746.20, up 54.25 points or 0.46 per cent and BSE Sensex was at 38,881.83, up by 187.72 or 0.49 per cent.