India power sector debt recast only a quick fix, says S&P

The Indian government's recent proposal to restructure debt of state-owned power distribution companies will provide them only a temporary reprieve from weakening finances, says global rating agency Standard & Poor's (S&P). The proposal in itself cannot do much to speed up the growth in India's power capacity to meet snowballing demand, said the rating agency in a media release.

According to S&P credit analyst Rajiv Vishwanathan, a sustained improvement in the credit quality of distribution companies and greater private sector participation is needed for a long-term solution to the country's power sector woes .

Under the government proposal, a portion of loans to the power distribution companies will be restructured. About half of these loans will be transferred to the respective state governments. This could be through guarantees on bonds that the distribution companies will issue.

"The power outage in early August affected 20 of India's 28 states, but had little impact on industry," said Vishwanathan in the release.

"One key reason is that several Indian companies have broken away from state-supplied electricity, and now depend on their own captive power plants. However, we believe that such a practice reduces the competitiveness of Indian businesses and deters investments by overseas companies," he said.

According to Geeta Chok, research analyst, S&P, "The impact of restructuring on financial institutions is clearly two-fold - on asset quality and on earnings. In terms of earnings, debt restructuring alone is unlikely to improve the weak credit-profile. We continue to see these loans as weak assets in our evaluation of Indian financial institutions."

S&P is of the view that an increase in investments to the sector is possible only with transparent tariff regulations and reliable fuel supply. A reliable fuel supply, in turn, hinges on availability of timely clearances and a transparent framework for producing fuel, and the presence of adequate infrastructure for transporting fuel.