Mumbai: An abandoned Jharkhand power plant could be the new bloated bad asset around the neck of Indian banks. Only this time, the bad loans that have stacked up are touching a staggering $38 billion, according to a report in Bloomberg.
Jharkhand is the last place where such a mammoth project should be turning sour. Because the state has abundant coal and water resources, cheap labour and the requisite infrastructure. To add to the glamour quotient, a rail track was supposed to run through the premises, and at the end of the tunnel was the prospect of producing 1,080 megawatts of electricity.
So, it was no surprise when a group led by the State Bank of India pounced on the opportunity and lent about $700 million five years ago to build the project. But there is the proverbial slip between the cup and the lip and the project today stands virtually abandoned; Result: The Indian banks in question have had to write off three quarters of their loans. In this context, Bloomberg cites Bank of America Merrill Lynch which has pointed out that Indian banks may be swamped with $38 billion in losses, which is many times the $9 billion they’ve written off in the ailing steel sector.
Everything was hunky and dory in the power sector until it took a turn for the worse in 2014, when the Supreme Court cancelled more than 200 coal-mining permits given to companies, calling the free allocations illegal. The decision hit several power projects, including the Jharkhand plant, and undermined the entire power sector. The troubling aspect is that haircuts of such dimension may now be the norm across the entire power sector. More so, since banks are under pressure from regulators to spruce up their books.
In the case of some projects, banks propose to wait and watch, in the vain hope that the situation will improve. At a meeting in Mumbai last month, lenders, including State Bank of India, Bank of Baroda and Punjab National Bank, suggested the creation of a new company to take over management of about 10 power projects, until demand for the assets picks up.
With the RBI breathing down their necks, power companies fear it would force many into insolvency. The Association of Power Producers even wrote to RBI Governor Urjit Patel earlier this year to point out that projects generating 75 gigawatts of electricity, about a fifth of India’s installed capacity, could be on the verge of slipping into bankruptcy, says the Bloomberg. At the Jharkand project site, there is little prospect of the project coming to life soon. The only traces of ‘life’ on the premises are the private security guards that are protecting the rusting structure.
