Coalgate: Banks to be hit but impact to be clear post Sep 1

Moneycontrol BureauThe Supreme Court’s verdict terming allocations of all the 200-plus coal blocks granted between 1993 and 2009 as illegal has raised a quandary over how much of an impact it will have on the financial sector.While analysts say it is too early to quantify the impact before the apex court decides on the action it prescribes for violators – in the form of fines or wholesale de-allocation – it is clear that asset quality pressures in the banking system as a whole are set to increase.Consider this: according to back-of-the-hand calculations, banks’ total exposure to the power and iron and steel sectors stands at about Rs 2.5 trillion-Rs 3.5 trillion.While not all of this is at the risk of turning bad, depending on the verdict and the degree of punishment meted out to firms guilty of violation, it could add to the woes of banks who have lent to them. Already, the two sectors are some of the biggest contributors to the already-high stressed assets on banks’ loan books. Experts have said that unlike the 2G scam ruling, when the apex court resorted to cancellation of licences, the ruling (which is expected to be delivered on September 1) may involve fining firms involved in violations.According to a Citi report, if a fine is levied, the impact may be transient though it would depend on the amount and the company.For instance, a smaller company may not be able to withstand the impact. However, if allocations are cancelled and fresh auctions are to be carried out, it could result in viability of projects coming under question.Here too, projects of smaller companies will have a larger chance of defaulting compared to bigger firms.Bankers Citi spoke to said that banks in any case have a lifeline from the recent set of guidelines the Reserve Bank of India issued, which allowed banks to refinance infrastructure loans through takeout finance where banks have to fund new lenders only for 25 percent of their refinance loans (compared to 50 percent earlier).Thus, banks can restructure such loans without terming them as such. The amount of hit banks will take from the ruling will also depend on each bank’s individual exposure.According to an Economic Times report, the country’s largest lender, State Bank of India, has a 9 percent exposure to the power sector. The exposure in case of another large lender, Punjab National Bank, is even higher, according to a report by a leading brokerage."An impact on one company can have implications for the financial sector as exposure to some companies is of the order of Rs 15,000 crore-Rs 20,000 crore," a bank chief told the ET.