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Follow on Google News | Tangible reforms critical for power sector lenders’ health: CRISILExposure of Rs.560 billion at risk by March 2013 in the absence of reforms
By: CRISIL Limited The risk to these lenders arises primarily from potential weakening in their asset quality due to two critical issues: escalating losses and debt levels in the power distribution sector, and the shortage of fuel for power generation. CRISIL estimates that the losses in the distribution segment have mounted to Rs.350-400 billion in 2010-11 (refers to financial year, April 1 to March 31), nearly doubling from 2008-09 levels. The losses may be higher if any of their large receivables need write-offs. Due to funding of these losses by debt, the cumulative debt of state power utilities, including distribution entities, has risen to an estimated Rs.3.0 trillion at the end of March 2011. Further, the structural threat of fuel unavailability and pricing can potentially impair the viability of almost one-third of the 56,000 MW of thermal generation capacity under implementation in India today. Therefore, progress on power sector reforms has become imperative to contain the potential asset-side risks for lenders. Says Ms. Roopa Kudva, Managing Director and CEO, CRISIL, “There are two critical aspects of reform. First, an improvement in systemic efficiency is required through reduction in distribution losses, which remain upwards of 25 per cent. CRISIL believes that greater involvement of the private sector in distribution could help achieve this objective. Second, a broad-based political consensus is needed for implementing tariff increases”. CRISIL estimates that tariffs need to be hiked by an average of 50 per cent for state utilities to break-even and eliminate need for subsidy; this order of increase will require significant political will. Equally important for lenders’ confidence is a need for timely availability of dependable information on utility financial performance, as well as a timely receipt of subsidy by distribution companies from the state governments. Initial steps towards reforms have begun; these include the formation of the high-level Shunglu committee, and a 12-point resolution by state power ministers. Further, lenders have started restricting loans to fund state utilities’ losses. As a result, the pace of much-needed tariff revisions has already increased. Says Mr. Pawan Agrawal, Director – CRISIL Ratings, “The extent and effectiveness of reforms in the sector remains a key monitorable over the next 18 months. Nevertheless, the strong credit risk profiles of specialised lenders (PFC and REC) continue to be underpinned by the expectation of support from the Government of India, given their strategic importance.” Media Contacts Mitu Samar Head, Communications and Brand Management CRISIL Limited Tel: +91-22- 3342 1838 Mobile No: +91- 9820061934 E-mail: msamar@crisil.com Tanuja Abhinandan Communications and Brand Management CRISIL Limited Tel: +91-22-3342 1818 Mobile: +91- 98192 48980 Email: tabhinandan@ Ramraj Pai Director – CRISIL Ratings Tel: +91-22-3342 3036 E-mail: rpai@crisil.com Analytical Contacts Pawan Agrawal Director - CRISIL Ratings Tel: +91-22-3342 3301 Email: pagrawal@crisil.com CRISIL Rating Desk Tel: +91-22-3342 3047/3342 3064 Email:CRISILratingdesk@ Note: This Press Release is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The Press Release may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. CRISIL has the sole right of distribution of its Press Releases for consideration or otherwise through any media including websites, portals etc. About CRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations. About CRISIL Ratings CRISIL is India’s first, largest, and most prominent credit rating agency. CRISIL pioneered the concept of credit rating in India more than 20 years ago, and has played a pivotal role in the development of India’s debt market. Today, CRISIL rates two-thirds of corporate bonds outstanding in India. As of 30 June 2011, CRISIL has rated more than 11,011 borrowers, covering around 34,342 debt instruments of a value exceeding Rs. 38 trillion. CRISIL has also assigned more than 20,000 Small and Medium Enterprise (SME) Ratings, and has the highest number of SME ratings outstanding in India. CRISIL PRIVACY NOTICE CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfill your request and service your account and to provide you with additional information from CRISIL and other parts of The McGraw-Hill Companies, Inc. you may find of interest. For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/ Last updated: March 31, 2011 Disclaimer: CRISIL has taken due care and caution in preparing this Press Release. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of information on which this Press Release is based and is not responsible for any errors or omissions or for the results obtained from the use of this Press Release. CRISIL, especially states that it has no financial liability whatsoever to the subscribers/ End
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