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Banks Will Have To ‘Abort’ Lending To Infrastructure Sector, Warns SBI

SBI is worried that more than half of the stressed power sector loans are not recoverable.

Workers labor at the construction site of a railway bridge in Dadri, Uttar Pradesh.(Photographer: Prashanth Vishwanathan/Bloomberg)  
Workers labor at the construction site of a railway bridge in Dadri, Uttar Pradesh.(Photographer: Prashanth Vishwanathan/Bloomberg)  

The nation’s largest lender State Bank of India Ltd. today said banks will have to “abort” lending to infrastructure projects, especially in the power sector, because of the harrowing experience of the past decade with most such loans turning sour.

“Somehow, the kind of problems which all banks are now faced with, may be they will have to abort their financing to the infra projects,” SBI Managing Director of Risk, IT and Subsidiaries Wing Dinesh Kumar Khara told reporters on the sidelines of an event.

Power-sector loans are facing a slew of problems due to changes in non-performing assets recognition after the Feb. 12 Reserve Bank of India circular, which was upheld by the Allahabad High Court last week. Following the end of the deadline on Aug. 27, as many as 30 power projects with a cumulative exposure of Rs 1.7 lakh crore are facing bankruptcy proceedings. Banks have under a fortnight to resolve them, else will have to be sent to the National Company Law Tribunal.

When asked if the infrastructure sector funding, critical for economic progress, is “untouchable for banks”, Khara singled out the power sector saying, “nobody wants to touch that”. Making it clear that banks are open to lending to all sectors till risks are hedged properly, he said there are problems relating to the fuel-supply pacts and power purchase agreements.

Khara said bankers are open to funding road projects.

SBI’s Managing Director PK Gupta said the Feb. 12 circular revamping the bad loan recognition norms has made it difficult for banks because of the stipulation of quicker recognition of an asset as an non-performing asset and its immediate referral to insolvency courts. Gupta said a referral to the National Company Law Tribunal will naturally lead to the annulment of power purchase agreements, which unnerves bankers.

SBI, which has an exposure of around Rs 27,000 crore to these troubled accounts, has assessed 11 power assets and has found four of them not resolvable, he said.

The amount of incremental provisioning that we may have to make is not very substantial as most of these assets are anyways NPAs and adequately provided for.
PK Gupta, Managing Director, State Bank of India.

Also, the full and immediate provisioning does not cover these accounts, which means that banks can stagger the loss coverage over a year.

According to a recent ICRA report, after the Aug. 27 deadline, banks will have to set aside nearly Rs 1 lakh crore in additional provisions for around 70 accounts in the power, engineering and telecom sectors.

Gupta said in an ideal case, if a bank is given more time, it will be able to get a resolution plan for the asset without going to the tribunals.