Asset Quality Risks From Power Sector Weakness to Continue: Moody's

India's power sector will continue to be a source of asset quality risk for banks if poor financial profiles of state electricity board distribution companies do not improve through further structural reforms, Moody's Investors Service said.

"The poor financial health of distribution companies in India is one of the key factors weighing on the asset quality of the country's banks," the rating agency said.

"So far, these problems have almost exclusively affected public-sector banks, which represent more than 70 per cent of total banking system assets, and which are directly and indirectly exposed to the credit quality of distribution companies," it said.

Moody's said that while private sector banks have almost no direct exposure to distribution companies, they are exposed indirectly if problems with distribution companies affect the credit quality of other borrowers in the electricity supply chain, especially power-generating companies, which are also creditors of the distribution companies.

The two government-owned financial institutions specialising in the provision of funds to the electricity sector - Power Finance Corporation and Rural Electrification Corporation - are not completely immune from the power-sector challenges, it said.

However, Moody's views these specialised financial institutions' position as being comparatively more stable, as they benefit from a number of protections, including an escrow account structure that effectively grants them priority of claims on their borrower's receivables, including those of distribution companies, it said.

The Moody's report points out that of all impaired loans at public-sector banks, 20 per cent are distribution companies exposures, with the proportion ranging as high as 48 per cent at some of the most exposed banks.