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

2. Insights
A knowledge sharing endeavour from CRISIL
Foreword
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
About CRISIL Insights
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.
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. 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
‘CRISIL Insights’ is a knowledge sharing endeavour from CRISIL to vulnerability, the credit risk profiles of specialised power sector lenders are underpinned by two key factors - first, an
l Share our analytical insights and thought leadership perspectives expectation of policy and funding support from the Government of India (GoI), given their strategic importance; and second, an
m CRISIL continues to focus on developing a strong understanding of the Indian
expectation of visible reforms in the sector.
economy, corporate sector, and financial landscape CRISIL believes that strong policy measures are urgently needed to reform the distribution sector. These include timely
m The knowledge and insights gained in this process are constantly shared with issuers availability of dependable financial information, meaningful and regular tariff hikes to enable recovery of economic costs of
and investors on relevant topics that impact the credit markets power supply, and significant reduction in the distribution losses. Further, higher and timely provisions of subsidies by the state
l Generate awareness about the rigour followed in our ratings process governments are critical to reduce their dependence on short-term borrowings.
m As the country’s leading ratings agency, CRISIL has always set standards in analytical
rigour, disclosures, and best practices in the industry 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
m CRISIL tries to generate familiarity of the market participants with the same
asset quality of power sector lenders will weaken, and they will require additional capital to maintain adequate coverage for the
l Enhance transparency of our analytical methodology and criteria increased delinquencies.
m To develop confidence of the debt market participants, CRISIL constantly endeavours
to highlight the analytical methodology and criteria used in its ratings process We hope you will find our insights and analysis useful. We welcome your feedback.
CRISIL Ratings hopes that you find this research valuable, insightful, and useful. Your Warm Regards,
comments and queries regarding the issues discussed here are welcome.
Ramraj Pai
Director - Ratings
Power Sector Lenders: Will the credit quality trip?

3. Insights
A knowledge sharing endeavour from CRISIL
Foreword
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
About CRISIL Insights
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.
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. 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
‘CRISIL Insights’ is a knowledge sharing endeavour from CRISIL to vulnerability, the credit risk profiles of specialised power sector lenders are underpinned by two key factors - first, an
l Share our analytical insights and thought leadership perspectives expectation of policy and funding support from the Government of India (GoI), given their strategic importance; and second, an
m CRISIL continues to focus on developing a strong understanding of the Indian
expectation of visible reforms in the sector.
economy, corporate sector, and financial landscape CRISIL believes that strong policy measures are urgently needed to reform the distribution sector. These include timely
m The knowledge and insights gained in this process are constantly shared with issuers availability of dependable financial information, meaningful and regular tariff hikes to enable recovery of economic costs of
and investors on relevant topics that impact the credit markets power supply, and significant reduction in the distribution losses. Further, higher and timely provisions of subsidies by the state
l Generate awareness about the rigour followed in our ratings process governments are critical to reduce their dependence on short-term borrowings.
m As the country’s leading ratings agency, CRISIL has always set standards in analytical
rigour, disclosures, and best practices in the industry 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
m CRISIL tries to generate familiarity of the market participants with the same
asset quality of power sector lenders will weaken, and they will require additional capital to maintain adequate coverage for the
l Enhance transparency of our analytical methodology and criteria increased delinquencies.
m To develop confidence of the debt market participants, CRISIL constantly endeavours
to highlight the analytical methodology and criteria used in its ratings process We hope you will find our insights and analysis useful. We welcome your feedback.
CRISIL Ratings hopes that you find this research valuable, insightful, and useful. Your Warm Regards,
comments and queries regarding the issues discussed here are welcome.
Ramraj Pai
Director - Ratings
Power Sector Lenders: Will the credit quality trip?

4. Analytical contacts Table of Contents
Name Designation Email Id Meaningful action on reforms critical for health of power sector 1
Pawan Agrawal Director - Corporate & Government Sector Ratings pagrawal@crisil.com Credit quality of power sector lenders - potential risks ahead 5
Nagarajan Narasimhan Director - Corporate & Government Sector Ratings nnarasimhan@crisil.com Power distribution utilities - current issues and what lies ahead 15
Sudip Sural Head - Corporate & Infrastructure Sector Ratings ssural@crisil.com Risks related to fuel and project execution will increase power generation costs 29
Suman Chowdhury Head - Financial Sector Ratings schowdhury@crisil.com FAQs on Power Finance Corporation Limited 37
Anosh Kelawala Senior Manager - Financial Sector Ratings akelawala@crisil.com FAQs on Rural Electrification Corporation Limited 55
Manish Ballabh Senior Manager - Corporate & Infrastructure Sector Ratings mballabh@crisil.com List of Rated Entities in the Power Sector 75
Manoj Damle Senior Manager - Financial Sector Ratings mdamle@crisil.com
Rohit Chugh Senior Manager - Corporate & Infrastructure Sector Ratings rchugh@crisil.com
Khyati Shah Manager - Corporate & Infrastructure Sector Ratings khyatis@crisil.com
Manish Saraf Manager - Financial Sector Ratings msaraf@crisil.com
Nitesh Jain Manager - Corporate & Infrastructure Sector Ratings njain@crisil.com
Subhasri Narayanan Manager - Financial Sector Ratings snarayanan@crisil.com
Vaibhav Kapoor Manager - Corporate & Infrastructure Sector Ratings vkapoor@crisil.com
Power Sector Lenders: Will the credit quality trip?

5. Analytical contacts Table of Contents
Name Designation Email Id Meaningful action on reforms critical for health of power sector 1
Pawan Agrawal Director - Corporate & Government Sector Ratings pagrawal@crisil.com Credit quality of power sector lenders - potential risks ahead 5
Nagarajan Narasimhan Director - Corporate & Government Sector Ratings nnarasimhan@crisil.com Power distribution utilities - current issues and what lies ahead 15
Sudip Sural Head - Corporate & Infrastructure Sector Ratings ssural@crisil.com Risks related to fuel and project execution will increase power generation costs 29
Suman Chowdhury Head - Financial Sector Ratings schowdhury@crisil.com FAQs on Power Finance Corporation Limited 37
Anosh Kelawala Senior Manager - Financial Sector Ratings akelawala@crisil.com FAQs on Rural Electrification Corporation Limited 55
Manish Ballabh Senior Manager - Corporate & Infrastructure Sector Ratings mballabh@crisil.com List of Rated Entities in the Power Sector 75
Manoj Damle Senior Manager - Financial Sector Ratings mdamle@crisil.com
Rohit Chugh Senior Manager - Corporate & Infrastructure Sector Ratings rchugh@crisil.com
Khyati Shah Manager - Corporate & Infrastructure Sector Ratings khyatis@crisil.com
Manish Saraf Manager - Financial Sector Ratings msaraf@crisil.com
Nitesh Jain Manager - Corporate & Infrastructure Sector Ratings njain@crisil.com
Subhasri Narayanan Manager - Financial Sector Ratings snarayanan@crisil.com
Vaibhav Kapoor Manager - Corporate & Infrastructure Sector Ratings vkapoor@crisil.com
Power Sector Lenders: Will the credit quality trip?

6. Insights
A knowledge sharing endeavour from CRISIL
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.
Mounting power purchase costs further weaken discoms' financials
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.
Discom distress can affect entire power value chain, including financiers
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.
Power Sector Lenders: Will the credit quality trip? 1

7. Insights
A knowledge sharing endeavour from CRISIL
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.
Mounting power purchase costs further weaken discoms' financials
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.
Discom distress can affect entire power value chain, including financiers
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.
Power Sector Lenders: Will the credit quality trip? 1

8. Meaningful action on reforms critical
for health of power sector
Focused efforts by Government and financiers to address the challenges Road ahead
The following concerted measures are geared towards addressing the challenges faced by the
sector: CRISIL believes that some of the initial steps will be sustained over the medium term, and that
l Commitment of State Governments: Following the formation of the Shunglu Committee further build-up of stress will be arrested and the annual losses contained. CRISIL projects
on State Power Utilities, the state power ministers adopted a 12-point resolution in July that the discom sector's net losses (subsidy booked basis) will be contained at broadly the
2011, addressing the key problems faced by discoms and the commitment of monetary same levels for 2011-12 and 2012-13. However, the debt will increase to Rs.3.3 trillion as on
and administrative support by state governments to resolve the challenges plaguing the March 31, 2013, from Rs.2.1 trillion as on March 31, 2011. CRISIL's base case assumptions for
discom sector. Timely tariff filing with the objective of bridging revenue gaps and 2011-12 and 2012-13 are as follows:
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 l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes, and the
sheets of discoms by converting state government loans to equity and clearing up subsidy curtailed lending by banks
dues. l Reduction of AT&C losses taking benefit of the R-APDRP scheme
l Lender's efforts: At the same time, in an attempt to discipline the fiscal management of
l State government subsidy to increase, given the fact that funding from banks and
discoms, banks and power financiers have come together and begun linking disbursal of financial institutions will not be available for weaker discoms, compelling state
funds to improvement in discoms' performance. This is to ensure that weak discoms do governments to bridge the gap
not take advantage of competition amongst lenders.
CRISIL believes that concrete action according to the plan laid out by the main stakeholders--
l Performance-linked credit mechanism: The Ministry of Power (MoP) is also
the Government of India, state governments, and the lenders--will be key to addressing the
contemplating merit-linked credit disbursal to discoms based on their operating
challenges facing the discom sector. If progress on this front is delayed, the adverse impact on
performance and credit rating.
l AT&C loss reduction: The MoP launched Government of India-funded Restructured
the power value chain as well as power financiers would begin to manifest itself over the next
Accelerated Power Development and Reforms Programme (R-APDRP) in July 2008 aimed 12 to 18 months.
at bringing down the AT&C losses in the sector. With a corpus of Rs.100 billion for Part-A
CRISIL's opinion piece, 'Power Distribution Utilities current issues and what lies ahead' details
projects and Rs.400 billion for Part-B projects, the R-APDRP scheme can go a long way in
the challenges that the discoms continue to face. The commentary, 'Risks related to fuel and
reducing the AT&C losses. The cumulative sanctions and disbursements under this
project execution will increase power generation costs', addresses emerging challenges for
scheme since inception have been Rs.220 billion and Rs.40 billion, respectively.
the generation sector, and their fallout on discoms.
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.
Power Sector Lenders: Will the credit quality trip? 3

9. Meaningful action on reforms critical
for health of power sector
Focused efforts by Government and financiers to address the challenges Road ahead
The following concerted measures are geared towards addressing the challenges faced by the
sector: CRISIL believes that some of the initial steps will be sustained over the medium term, and that
l Commitment of State Governments: Following the formation of the Shunglu Committee further build-up of stress will be arrested and the annual losses contained. CRISIL projects
on State Power Utilities, the state power ministers adopted a 12-point resolution in July that the discom sector's net losses (subsidy booked basis) will be contained at broadly the
2011, addressing the key problems faced by discoms and the commitment of monetary same levels for 2011-12 and 2012-13. However, the debt will increase to Rs.3.3 trillion as on
and administrative support by state governments to resolve the challenges plaguing the March 31, 2013, from Rs.2.1 trillion as on March 31, 2011. CRISIL's base case assumptions for
discom sector. Timely tariff filing with the objective of bridging revenue gaps and 2011-12 and 2012-13 are as follows:
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 l Regular tariff hikes, given the 12-point resolution, the recent tariff hikes, and the
sheets of discoms by converting state government loans to equity and clearing up subsidy curtailed lending by banks
dues. l Reduction of AT&C losses taking benefit of the R-APDRP scheme
l Lender's efforts: At the same time, in an attempt to discipline the fiscal management of
l State government subsidy to increase, given the fact that funding from banks and
discoms, banks and power financiers have come together and begun linking disbursal of financial institutions will not be available for weaker discoms, compelling state
funds to improvement in discoms' performance. This is to ensure that weak discoms do governments to bridge the gap
not take advantage of competition amongst lenders.
CRISIL believes that concrete action according to the plan laid out by the main stakeholders--
l Performance-linked credit mechanism: The Ministry of Power (MoP) is also
the Government of India, state governments, and the lenders--will be key to addressing the
contemplating merit-linked credit disbursal to discoms based on their operating
challenges facing the discom sector. If progress on this front is delayed, the adverse impact on
performance and credit rating.
l AT&C loss reduction: The MoP launched Government of India-funded Restructured
the power value chain as well as power financiers would begin to manifest itself over the next
Accelerated Power Development and Reforms Programme (R-APDRP) in July 2008 aimed 12 to 18 months.
at bringing down the AT&C losses in the sector. With a corpus of Rs.100 billion for Part-A
CRISIL's opinion piece, 'Power Distribution Utilities current issues and what lies ahead' details
projects and Rs.400 billion for Part-B projects, the R-APDRP scheme can go a long way in
the challenges that the discoms continue to face. The commentary, 'Risks related to fuel and
reducing the AT&C losses. The cumulative sanctions and disbursements under this
project execution will increase power generation costs', addresses emerging challenges for
scheme since inception have been Rs.220 billion and Rs.40 billion, respectively.
the generation sector, and their fallout on discoms.
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.
Power Sector Lenders: Will the credit quality trip? 3

10. Insights
A knowledge sharing endeavour from CRISIL
Credit quality of power sector lenders -
potential risks ahead
Executive Summary
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.
Overview of borrowings by the power sector
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? 5

11. Insights
A knowledge sharing endeavour from CRISIL
Credit quality of power sector lenders -
potential risks ahead
Executive Summary
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.
Overview of borrowings by the power sector
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? 5

12. Credit quality of power sector lenders -
potential risks ahead
Chart 1: Source of borrowings by power sector as on March 31, 2011 Chart 2: Growth trend in power sector advances
8
7
Others 6
25%
5
Rs. Trillion
5 year CAGR of 31%
Banks 4
42%
3
Other IFCs
5% 2
1
0
2006 2007 2008 2009 2010 2011 2013 (P)
PFC + REC
28%
As on March 31,
Banks to remain major lenders
This article focuses on these key lenders' exposure to the power sector, and assesses their
asset quality. 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
Lenders' power sector exposures to increase further 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
CRISIL believes that the lenders' power sector advances will continue to increase steadily over
to fund-based exposures may increase the share of power sector advances to about 7.8 per
the medium term. The lenders' power sector advances have grown at a compound annual
cent of banks' total advances by March 31, 2013 (see Chart 3).
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.
Chart 3: Growth in banking industry's power sector advances
CRISIL estimates that advances to the sector will grow further, at a CAGR of 23 per cent over 4.5 9.0%
7.8%
the next two years to about Rs.7.3 trillion as on March 31, 2013 (see Chart 2). The growth will 4.0 Undisbursed Sanctions
7.3%
8.0%
be driven primarily by the strong pipeline of undisbursed sanctions to the power sector. 3.5
6.2%
7.0%
Rs. Trillion
3.0 6.0%
4.8%
2.5 4.0% 3.8% 5.0%
Nevertheless, growth in power sector advances may moderate, given the lenders' increasing 2.0
3.7%
4.0%
caution in disbursing to the sector, especially to the SPUs. The banks, in particular, have 1.5 3.0%
slowed down fresh sanctions to new power sector projects. The sector will also look to the 1.0 2.0%
0.5 1.0%
lenders to fund its ongoing investments in transmission and distribution, increasing working 0.0 0.0%
capital requirements due to increased losses of distribution companies, and projects under 2006 2007 2008 2009 2010 2011 2013 (P)
As of March
implementation.
Power sector Advances Undisbursed sanctions Share in total advances
Power Sector Lenders: Will the credit quality trip? 7

13. Credit quality of power sector lenders -
potential risks ahead
Chart 1: Source of borrowings by power sector as on March 31, 2011 Chart 2: Growth trend in power sector advances
8
7
Others 6
25%
5
Rs. Trillion
5 year CAGR of 31%
Banks 4
42%
3
Other IFCs
5% 2
1
0
2006 2007 2008 2009 2010 2011 2013 (P)
PFC + REC
28%
As on March 31,
Banks to remain major lenders
This article focuses on these key lenders' exposure to the power sector, and assesses their
asset quality. 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
Lenders' power sector exposures to increase further 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
CRISIL believes that the lenders' power sector advances will continue to increase steadily over
to fund-based exposures may increase the share of power sector advances to about 7.8 per
the medium term. The lenders' power sector advances have grown at a compound annual
cent of banks' total advances by March 31, 2013 (see Chart 3).
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.
Chart 3: Growth in banking industry's power sector advances
CRISIL estimates that advances to the sector will grow further, at a CAGR of 23 per cent over 4.5 9.0%
7.8%
the next two years to about Rs.7.3 trillion as on March 31, 2013 (see Chart 2). The growth will 4.0 Undisbursed Sanctions
7.3%
8.0%
be driven primarily by the strong pipeline of undisbursed sanctions to the power sector. 3.5
6.2%
7.0%
Rs. Trillion
3.0 6.0%
4.8%
2.5 4.0% 3.8% 5.0%
Nevertheless, growth in power sector advances may moderate, given the lenders' increasing 2.0
3.7%
4.0%
caution in disbursing to the sector, especially to the SPUs. The banks, in particular, have 1.5 3.0%
slowed down fresh sanctions to new power sector projects. The sector will also look to the 1.0 2.0%
0.5 1.0%
lenders to fund its ongoing investments in transmission and distribution, increasing working 0.0 0.0%
capital requirements due to increased losses of distribution companies, and projects under 2006 2007 2008 2009 2010 2011 2013 (P)
As of March
implementation.
Power sector Advances Undisbursed sanctions Share in total advances
Power Sector Lenders: Will the credit quality trip? 7

14. Credit quality of power sector lenders -
potential risks ahead
Strong growth in the banks' power sector advances has resulted in a gradual increase in their past 5 years to Rs.1.8 trillion as on March 31, 2011. Their share in lending to the SPUs has,
market share over the past few years; banks have a market share of about 56 per cent as on however, reduced in recent years on account of intensifying competition from banks.
March 31, 2011, and are expected to maintain market share over the medium term because Nevertheless, CRISIL believes that PFC and REC may remain the key lenders to the SPUs, and
of the pipeline of undisbursed sanctions. meet nearly half of the SPUs' incremental funding requirements by March 2013.
Chart 4: Trend in market share of power sector lenders Increasing systemic risks: A cause for worry?
100% 5% 6% 6% The gross NPAs of power sector lenders are currently negligible; the banks' gross NPAs in
80%
power sector advances remain at less than 0.2 per cent as on March 31, 2011. PFC and REC's
38% 38%
48%
gross NPAs are at 0.2 per cent and 0.3 per cent, respectively, as on June 30, 2011.
60%
40%
However, the lenders' asset quality remains exposed to increased systemic risks in the power
47%
56% 56%
sector, especially in SPU exposures (refer to CRISIL article, 'Meaningful action on reforms
20%
critical for health of power sector’ for details). SPUs account for nearly two-thirds of the
0% power sector exposure of lenders as on March 31, 2011 (see Chart 5). CRISIL has, therefore,
2006 2011 2013 (P)
As of March
analysed the impact of this exposure on the lenders' asset quality.
Banks PFC and REC Other IFCs
Chart 5: Sector wise composition of power sector advances as on March 31, 2011
Exposure to private sector projects to drive banks' power sector advances growth
Currently, the shares of SPUs, CPUs, and private sector in the banking industry's power sector Private Central
22% 15%
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 State
63%
is, therefore, expected to increase to about 30 per cent over the next 2 years.
PFC and REC to remain key lenders to SPUs
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
Power Sector Lenders: Will the credit quality trip? 9

15. Credit quality of power sector lenders -
potential risks ahead
Strong growth in the banks' power sector advances has resulted in a gradual increase in their past 5 years to Rs.1.8 trillion as on March 31, 2011. Their share in lending to the SPUs has,
market share over the past few years; banks have a market share of about 56 per cent as on however, reduced in recent years on account of intensifying competition from banks.
March 31, 2011, and are expected to maintain market share over the medium term because Nevertheless, CRISIL believes that PFC and REC may remain the key lenders to the SPUs, and
of the pipeline of undisbursed sanctions. meet nearly half of the SPUs' incremental funding requirements by March 2013.
Chart 4: Trend in market share of power sector lenders Increasing systemic risks: A cause for worry?
100% 5% 6% 6% The gross NPAs of power sector lenders are currently negligible; the banks' gross NPAs in
80%
power sector advances remain at less than 0.2 per cent as on March 31, 2011. PFC and REC's
38% 38%
48%
gross NPAs are at 0.2 per cent and 0.3 per cent, respectively, as on June 30, 2011.
60%
40%
However, the lenders' asset quality remains exposed to increased systemic risks in the power
47%
56% 56%
sector, especially in SPU exposures (refer to CRISIL article, 'Meaningful action on reforms
20%
critical for health of power sector’ for details). SPUs account for nearly two-thirds of the
0% power sector exposure of lenders as on March 31, 2011 (see Chart 5). CRISIL has, therefore,
2006 2011 2013 (P)
As of March
analysed the impact of this exposure on the lenders' asset quality.
Banks PFC and REC Other IFCs
Chart 5: Sector wise composition of power sector advances as on March 31, 2011
Exposure to private sector projects to drive banks' power sector advances growth
Currently, the shares of SPUs, CPUs, and private sector in the banking industry's power sector Private Central
22% 15%
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 State
63%
is, therefore, expected to increase to about 30 per cent over the next 2 years.
PFC and REC to remain key lenders to SPUs
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
Power Sector Lenders: Will the credit quality trip? 9

16. Credit quality of power sector lenders -
potential risks ahead
Approach to categorising risks in power sector exposures Chart 6: Risk matrix of SPU exposures
Bihar
Cluster IV Himachal Pradesh Jammu & Kashmir
SPU exposures (Lowest) West Bengal North Eastern States
(excluding Assam)
Most SPUs have weak financial risk profiles, because of mounting losses and large debt, and
State Government ability to support
Jharkhand
delays in receipt of subsidies from the state governments. CRISIL has undertaken a detailed Madhya Pradesh
Kerala Assam
Cluster III Punjab
analysis, and prepared a risk matrix (see Chart 6) to ascertain the impact of SPU exposures on Uttarakhand Orissa
Rajasthan
Uttar Pradesh
lenders' asset quality.
Andhra Pradesh
Goa Chhattisgarh
Cluster II Haryana
l Given that SPUs continue to operate as an arm of, and depend on, the state governments, Gujarat Maharashtra
Tamil Nadu
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 Cluster I
Delhi Karnataka
(Highest)
the portfolio.
Low Risk Moderate Risk High Risk
l The X-axis represents the risk profile of SPUs. Exposure to SPUs has been classified into
Risk profile of State Power Utilities
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 Highest Risk High Risk Moderate Risk Low Risk
(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 The lenders' SPU exposures have, thus, been categorised into four risk categories - from low
strong linkages among generation, transmission and distribution companies. risk to highest risk - as indicated in Table 1:
l The Y-axis represents the state governments' ability to support the SPUs. Based on the Table 1: Risk categorisation of SPU exposures
health of state finances, states have been classified into four - with Cluster I denoting Per Cent Rs. Trillion
highest ability, and Cluster IV, lowest ability. Clustering of the states' financial risk profiles Highest Risk 40 1.2
is based on analyses of state finances on three key parameters - fiscal management, self- High Risk 30 0.9
reliance, and debt-servicing ability. 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.
Private sector exposures
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.
Power Sector Lenders: Will the credit quality trip? 11