Mounting NPAs: PFC and REC hit by stressed assets

PFC and REC hit by stressed assets

The leading lenders to the power sector, the Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) are facing the heat of rising non-performing assets (NPAs) and a slowdown in loan requests for new conventional projects. Both the state-owned financiers are bearing the brunt of increasing stranded generation capacity, which has impacted the repaying capacity of the stranded projects. As of June 2016, PFC’s gross NPAs were a whopping Rs 75.6 billion, which was over one and a half times as compared to the Rs 29.3 billion in the previous year. REC’s gross NPAs on the other hand stood at Rs 48.16 billion in the first quarter of 2016-17 as compared to Rs 15.77 billion in the corresponding quarter of the previous year.

During 2015-16, PFC’s gross NPA to the total loan ratio increased substantially to 3.15 per cent from 1.16 per cent in the previous year. The break-up of NPAs indicates that five thermal projects aggregating a loan amount of Rs 34.28 billion account for over 45 per cent of the NPAs followed by four hydro projects (Rs 26.98 billion), two gas-based power plants (Rs 13.35 billion) and three biomass projects (Rs 590 million). As of March 2016, PFC’s restructured assets stood at Rs 322.6 billion, 56 per cent of which were already commissioned. Of this, the company expects assets worth Rs 115.5 billion to be upgraded to standard assets in the current financial year and the balance in 2017-18. Further, assets worth Rs 124 billion and Rs 19 billion are expected to be commissioned in 2016-17 and 2017-18 respectively.

There has been an overall slowdown in loan sanctions to new projects as well. Despite an improvement in the year-on-year figures for 2015-16, PFC’s and REC’s loan sanctions declined by 13 per cent and 18 per cent respectively as compared to the corresponding figures in 2012-13. REC’s loan sanctions reached a peak of 1,091 projects in 2011-12. The numbers have been consistently declining ever since and only 609 projects were sanctioned in 2014-15. There was a marginal rise to 625 projects in 2015-16.

Another aspect that impacts the financials of these companies is the skew in their customer base towards the state sector, which is reeling under severe losses. However, the implementation of the Ujwal Discom Assurance Yojana (UDAY), which aims to restructure the debt of discoms by floating sovereign guaranteed bonds, will help in the prepayment of the outstanding loans of discoms to PFC and REC. Until there is a turnaround in the health and operations of discoms as promised by UDAY, the sector as well as the lenders will continue to be under pressure.

Experts say that the current state of affairs is the result of the irrational euphoria which started towards the end of the previous decade, when several players forayed into the generation sector, and lenders extended funding to projects without firm power purchase agreements or tie-ups. Another view is that this is the result of wrong planning. According to a sector expert, “Accountability of planners is very low in this country. The current situation with stranded assets is due to wrong planning, resulting in the locking of huge public money, NPAs, etc.”

The financial highlights of the two companies over the past one year…

PFC’s key financials

  •  PFC’s total income increased by 11 per cent to Rs 275.6 billion during 2015-16 as compared to 2014-15. During the first quarter of 2016-17, the total income rose by 6 per cent to Rs 71.6 billion in comparison to the corresponding period in 2014-15.
  • During 2015-16, the company’s net profit registered an annual growth of 3 per cent to reach Rs 61.1 billion. However, during the fourth quarter of 2015-16, the net profits declined by 19 per cent due to higher provisions on account of NPAs and an increase in restructured assets. During the first quarter of 2016-17, net profits increased again by 9 per cent to Rs 17.1 billion.
  • The total sanctions increased by 76 per cent to reach Rs 346.1 billion in the first quarter of 2016-17. For 2015-16, the total sanctions recorded a year-on-year growth of 7 per cent at Rs 650.4 billion. The total outstanding sanctions in the first quarter of 2016-17 were Rs 1,551.4 billion. All these figures exclude sanctions under the Restructured Accelerated Power Development and Reforms Programme (R-APDRP), which were Rs 197.47 billion during 2015-16 as compared to Rs 15.6 billion in the previous year. During the first quarter of 2016-17, R-APDRP sanctions were Rs 15.7 billion.
  •  In terms of the company’s total sanctions during 2015-16, 59 per cent or Rs 382.4 billion was allocated for generation projects and 25 per cent for others comprising transitional finance, studies, short-term loans, buyer line of credit and funding of regulatory assets. The transmission and distribution sectors accounted for 9 per cent and 7 per cent respectively. In contrast, 81 per cent of the total sanctions during quarter one of 2016-17 were dedicated to the generation segment, while others accounted for 18 per cent and the transmission segment for the remaining 1 per cent.
  • Sector-wise, the state sector accounted for 92 per cent of the sanctions in the first quarter of 2016-17 followed by the central sector (5 per cent) and private sector (3 per cent). Even during 2015-16, the majority of  sanctions were made in the state sector at 70 per cent, followed by the private sector (13 per cent), central sector (10 per cent) and joint sector (7 per cent). Recent sanctions in the private sector largely pertain to renewable generation projects.
  •  The generation sector accounted for 75 per cent or Rs 1,160.5 billion of the outstanding sanctions as of June 2016. Of this, documents for loans worth Rs 510.5 billion are yet to be executed. Generation was followed by transmission at Rs 194.8 billion, while distribution accounted for Rs 106.7 billion. The state sector accounted for over 71 per cent of the outstanding sanctions at Rs 1,104.7 billion. The private sector accounted for Rs 299.3 billion while the central and joint sectors accounted for the remaining.
  • Total disbursement excluding the R-APDRP was Rs 465.9 billion during 2015-16, which was 4 per cent higher than the previous year’s figure. During the first quarter of 2016-17, disbursements worth Rs 77.5 billion were made. Disbursements under the R-APDRP were close to Rs 10 billion during 2015-16 and Rs 6.6 billion in the first quarter of 2016-17.
  • The maximum disbursement of 57 per cent or Rs 263.8 billion was made in the generation segment during 2015-16 followed by others at 35 per cent. During the first quarter of 2016-17, close to half of the disbursements were made in the others category at Rs 36.9 billion followed by the generation segment (42 per cent), and the transmission (9 per cent) and distribution (2 per cent) segments.
  •  Sector-wise, the state sector accounted for 76 per cent of the disbursements in the first quarter of 2016-17 and 69 per cent during 2015-16. The private sector accounted for 15 per cent during each of the above two periods.
  • The company’s net worth increased by 10 per cent (as of June 2016) to reach Rs 371.4 billion from Rs 337.2 billion in the previous year.

REC’s key financials

  • REC’s total income grew by 17 per cent to Rs 237.6 billion in 2015-16 as compared to Rs 203.9 billion in the previous year, while the profit after tax (PAT) increased by 7 per cent to Rs 56.3 billion from Rs 52.6 billion. Loan sanctions and disbursements recorded a year-on-year growth of 7 per cent each to reach Rs 654.7 billion and Rs 460.3 billion respectively. The company’s net worth increased by 15 per cent to Rs 286.2 billion. By end-June 2016, the company’s net worth further increased to Rs 299.5 billion.
  • During the first quarter of 2016-17, the total income increased by 6 per cent to Rs 60.5 billion from Rs 57.1 billion, while PAT declined by 4 per cent to Rs 14.2 billion from the corresponding quarter of the previous year. Total sanctions during the first quarter of 2016-17 more than doubled to Rs 158.8 billion as compared to Rs 75.9 billion in the same period in the previous year. Disbursements increased by about 26 per cent to Rs 116.9 billion.
  • About 48 per cent of the sanctions during 2015-16 were made for the transmission and distribution (T&D) segments followed by another 47 per cent to the generation segment and the remaining 3 per cent was short-term loans. The T&D segment sanctions include those made under the Deendayal Upadhyaya Gram Jyoti Yojana.
  • During the first quarter of 2016-17, Rs 85.4 billion or 54 per cent of the sanctions were made for the generation segment followed by the T&D segments at 30 per cent and short-term loans at 16 per cent. This is in sharp contrast to the corresponding period in the previous year when only 15 per cent of the sanctions were accounted for by the generation segment, while the majority or 79 per cent was made for the T&D segments.
  • In terms of disbursement, during 2015-16, 67 per cent was made for the T&D segments followed by the generation segment (29 per cent) and short-term loans (5 per cent). During the first quarter of 2016-17, 47 per cent of disbursements were to the T&D segments followed by generation (35 per cent) and short-term loans (18 per cent).
  • The state sector accounted for the majority of outstanding loans at Rs 1,539.4 billion or 77 per cent of Rs 2,012.8 billion at the end of 2015-16. The private sector came second with a 15 per cent share, while the joint sector accounted for the remaining 8 per cent. At the end of the first quarter of 2016-17, the outstanding loan stood at Rs 1,888.4 billion, the majority of which was accounted for by the state sector at 74 per cent. The private and joint sectors accounted for 17 per cent and 9 per cent respectively. The average maturity period of the outstanding loans (as of June 2016) was 5.87 years.

Recent developments relating to slowdown in the launch of new conventional generation projects as well as restrictions on future borrowings by discoms under UDAY until they achieve financial turnaround are expected to create continued pressure on loan growth and margins of the two state-owned financial institutions at least in the next couple of years. Discom turnaround under UDAY will have a positive impact on the overall power sector, improving the asset quality of PFC and REC in the long term. The improvement in the financial health of discoms will help in relieving the stress on the generation segment, in which these financial institutions, particularly PFC, have high exposure. While these companies are securing their bottom lines by restructuring existing loans, they will have to simultaneously overhaul their portfolios to include more transmission and renewable energy projects. Both PFC and REC must quickly rejig their future strategy to ensure a sustainable financing environment in the power sector.