The slow resolution of stressed thermal assets, accumulated discom dues, and headwinds faced by the renewable energy sector have impacted the asset quality of infrastructure finance companies (IFC) in the power sector.

Infrastructure credit saw a negligible increase to Rs 21.2 lakh crore in the first-half of fiscal 2020, as against Rs 21.1 lakh crore in fiscal 2019, , according to ratings agency ICRA.

This almost flat increase in the first-half means that the government’s fiscal position would come in the way of higher spending on infrastructure. “Overall, the growth in total infrastructure credit in FY2020 is likely to remain lower than last year,” noted ICRA.

The tepid credit growth in the first half of fiscal 2020 was led by de-growth in banking sector credit to the infrastructure segment. Additionally, IFCs’ share of total infrastructure credit increased at a slow pace to 50 per cent in September 2019, from 38 per cent in 2015.

The decline in the share of banks during the past few years was due largely to the conversion of their exposure to state distribution companies (discoms) into bonds and subdued lending amid asset quality issues and capital constraints, noted ICRA.

During FY2016-FY2018 the asset quality of IFCs was affected by the stress in the thermal power sector, amidst structural issues and asset quality review by banks.

This comes in the backdrop of power demand and electricity generation in the country declining for a fourth quarter in a row (in November) due to a slowdown in demand from states and unseasonal rains. A report by SBI has highlighted the fact that electricity demand in India contracted to an eight-year-low in September,impacting the power producer, distributor and lenders (banks).

While the stress related to the thermal power sector has been recognised by IFCs, any stress build-up in the near to medium term due to headwinds faced by the renewable energy sector, remains a concern. The aggregate exposure of IFCs to the renewable energy sector was about Rs 90,000 crore or 9 per cent of the loan book in September 2019, according to ICRA. PFC, L&T Finance and SREI are some of the companies in this segment.

“The cost of funds for IFCs has been impacted by ongoing risk aversion towards NBFCs. While some of the public sector IFCs have been impacted to a lesser extent, the larger ones have been impacted by company-specific developments. Overall, IFCs haven’t significantly benefited from the broader softening of systemic interest rates,” said Manushree Saggar, Vice-President and Head, Financial Sector Ratings, ICRA.

Given the relatively long tenure of assets compared to the average tenure of borrowings, the asset liability maturity (ALM) profiles of IFCs (except infrastructure debt funds - IDFs) continue to be characterised by sizeable cumulative negative mismatches in the near-term. ALM is the process of managing the use of assets and cash flows to reduce the firm’s risk of loss from not paying liabilities on time.

ICRA also pointed out that despite the various measures undertaken by the government and the lenders, progress on stressed thermal asset resolution is slow. About 10 per cent of the stressed capacity has achieved resolution, with another 4 per cent resolved, but which continue to remain under stress.

Besides in the transition to Ind-AS accounting standards, IFCs have booked additional impairments. While capitalisation levels were adversely impacted, provision coverage and solvency improved.

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