Abandoned Power Plant Poses $38 Billion Warning On Banks

Abandoned Power Plant Poses $38 Billion Warning On Banks

Power Plant which are abandoned is a warning sign for Indian banks. Deep in the jungles of eastern India lies abandoned power plant carrying bad loan of $38 billion. This $38 billion can be additional bad loans. Bad loan of this magnitude can engulf the country’s banks.

Load Shedding : Indian village and agriculture has a huge power deficit. The government set itself a target of producing 1,178 billion units soon in order to meet demand and achieve an overall power surplus of 1.1%. India will have more electricity than it needs. Yet that doesn’t mean power cuts will be a thing of the past. Load shedding isn’t going anywhere.

Jharkhand Power Project : A group led by State Bank of India lent them about $700 million five years ago. Jharkhand Power Project had all the markings of success like abundant coal and water in the area, a rail track was set to run through the premises. It promised 1,080 megawatts of electricity which was very alluring in a country that faces persistent power shortages and blackouts.

Bad Loan : Banks stands over-stressed as it had to write off three quarters of their loans. Bad Loan of that magnitude because of court-ordered blocking coal mining permits is a huge loss of bank. Bank of America Merrill Lynch suggests local banks to face a new $38 billion wave of losses. This is more than four times the $9 billion they’ve written off. India’s banks, which have some of the highest stressed asset ratios globally, are under mounting pressure.

Supreme Court Canceled : The government attempts to revive loan growth and boost the economy is facing immense challenge. The power sector took a turn for the worse in 2014, when the Supreme Court canceled more than 200 coal-mining permits given to companies, calling the free allocations illegal. This sudden decision has hurt several power projects.

But will this be possible ? Many banks are unwilling to accept losses of that magnitude. This is leading to a tussle between lenders and potential buyers over valuations. Such disputes are delaying a solution on the biggest stressed loan accounts in India. Sales will happen if banks take a more realistic approach on valuations.

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. But will this be possible ?