New Delhi: India's largest state-run NBFC (non-banking finance company) PFC (Power Finance Corporation) and REC (Rural Electrification Corporation Ltd) charged with financing a large part of India's growing need for electricity generation, may instead be funding a herd of white elephants — obsolete and economically unviable coal-fired power plants that could soon become stranded assets, said IEEFA. In its latest report, IEEFA (Institute for Energy Economics and Financial Analysis), has said that at least 54 percent of the loan book of PFC and REC is occupied by thermal power sector and the lending has resulted in NPAs amounting to Rs 47,454 crore.
In the report, titled India's Power Finance Corporation continues to fund non-performing coal assets, author Kashish Shah said that when India's government-owned PFC acquired the REC, it formed the country's largest non-banking finance company, and a critically important lender for India's power sector, with a total asset book approaching US$100bn as of December 2019.
PFC and REC have lent extensively to coal-fired power projects, with Rs 3,43,746 crore (US$49bn), or 54 percent of their total loan book, exposed to thermal power, the report said. This lending has, in turn, accumulated an extensive list of non-performing assets on their balance sheets, amounting to roughly Rs 47,454 crore (US$6.8bn) as of December 2019.
"But IEEFA views the extent of their stranded asset risk significantly higher than this as India's thermal power generation sector continues to trouble the country's banks, accounting for US$40-60bn in stranded assets," said Shah.
"And with India's thermal power generation sector under severe stress from carrying those US$40-60bn of non-performing assets, financing from private banking institutions to the sector has dried up," Shah added. Transcripts from PFC investor meetings from FY2017/18 reveal PFC has provided refinancing loans to NTPC's Meja plant (1,320 MW) of Rs 3,700 crore (US$500m) and Raichur Yermarus Power project (1600MW), a project of Karnataka Power Corporation Ltd (KPCL) and BHEL, of Rs 1,700 crore (US$260m).
"IEEFA views PFC's lending to new existing or new thermal power developments as extremely risky in light of the expected tariffs on these projects being 60-70 percent above the prevailing renewable energy tariffs of Rs 2.50-2.80/kWh," said Shah.
Four new projects with a total capacity of 8.8 GW began construction in India in 2019, and all have received funding from PFC and REC. "IEEFA questions how PFC can expect to get a viable total project return over the 40-year life of thermal power plants given the uncompetitive tariffs these projects require, particularly in the light of rising financial distress at distribution companies (discoms) which are demanding an ever-lower cost of procuring new power generation," said Shah.
The report further sheds light on PFC's asset impairment costs and provisioning cover for its non-performing assets. PFC and REC both have materially increased their lending to the renewable energy sector, in line with the government's long-term power sector objectives. However, in FY2018-19, PFC lent US$1.2bn to renewable energy projects — only capturing less than one-tenth of the market for renewable lending.
"Given that poor market share and the speed of the global energy transition, we recommend that PFC should strategically pivot to lend more to support renewable capacity growth," said Shah.