Banks may take a hit as Allahabad HC refuses relief to power companies, SBI, PNB, BOI in focus

The Allahabad High Court on Monday refused to grant interim relief to power sector defaulters that had appealed for a stay on the Reserve Bank of India (RBI) circular on being dragged to the National Company Law Tribunal. This, according to experts, could hurt the banking sector.

Close to 60 companies, including power firms, have turned loan defaulters and will have to be taken to the NCLT by lenders after the 180-day grace period granted by the Reserve Bank of India’s February 12 circular ended on August 27.

Currently, bankers are trying to resolve the pile of stressed power assets under the Samadhan scheme working with the power companies.

Power sector companies together owe banks roughly Rs 1-1.77 lakh crore.

“Approximately 34 companies involving Rs 1.77 lakh crore are under stress. Of those, while in some cases (size of Rs 70,000 crore) probability of resolution is decent; however, for the remaining 1 Lakh crore (on system level) are likely to fetch meager recovery,” Lalitabh Shrivastawa - AVP - Research - Sharekhan by BNP Paribas told Moneycontrol.

“Consequently, banks may have to take a higher haircut for those cases – Negative read through for banks like SBI, BOB, ICICI, Axis Bank etc. who may witness increased provisions,” he said.

Banks with the highest exposure to power companies include names like Bank of India, SBI, Union Bank of India, PNB, Axis Bank, Bank of Baroda, ICICI Bank, and HDFC Bank.

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Technically, banks aren’t required to downgrade or accelerate provisioning on loans referred to NCLT, but experts feel that there is some risk of slippages from the non-NPL part of such loans.

“Power remains among the most stressed sectors for banks and with heavy downgrades over past two to three quarters, banks’ NPL ratios could be now +25 percent,” said a CLSA report.

The large corporate banks such as SBI, ICICI Bank, and Axis Bank have tagged 20-40 percent of power loans as NPL and 20-65 percent are rated A and above (including PSUs), so residual stress should be 15-30 percent of power loans (1-2 percent of total loans).

“We have built a large portion of such loans slipping into NPLs over FY19-20; provision against such loans will keep credit costs elevated. Banks indicate that of total power exposure that may be covered by this circular, they are close to resolving 20  percent of total (mostly though asset sale to new buyers), but the rest might head to insolvency proceedings,” said the CLSA report.