Govt-owned PFC accumulates NPAs of Rs 47,454 cr: IEEFA

Government-owned Power Finance Corporation (PFC) has accumulated non-performing assets (NPAs) totalling Rs 47,454 crore ($6.8bn) as of December 2019, a new report by the Institute for Energy Economics and Financial Analysis (IEEFA) said on Thursday.

The report -- India's Power Finance Corporation continues to fund non-performing coal assets -- says when the PFC acquired the Rural Electric Corporation Ltd (REC), it formed the country's largest non-banking finance company (NBFC), and a critically important lender for India's power sector, with a total asset book approaching $100bn as of December 2019.

Author and energy finance analyst Kashish Shah said the PFC and the REC have lent extensively to coal-fired power projects, with Rs 343,746 crore ($49bn), or 54 per cent of their total loan book, exposed to thermal power.

"But IEEFA views the extent of their stranded asset risk significantly higher than this as India's thermal power generation sector continues to trouble the country's banks, accounting for $40-60bn in stranded assets," Shah said in a statement.

"And with India's thermal power generation sector under severe stress from carrying those $40-60bn of non-performing assets, financing from private banking institutions to the sector has dried up."

Transcripts from PFC investor meetings from FY2017/18 reveal the PFC has provided refinancing loans of Rs 3,700 crore ($500 m) to NTPC's Meja plant (1,320 MW) and of Rs 1,700 crore ($260 m) to Raichur Yermarus Power project (1,600 MW) (a project of Karnataka Power Corporation Ltd (KPCL) and BHEL.

"IEEFA views PFC's lending to new existing or new thermal power developments as extremely risky in the light of the expected tariffs on these projects being 60-70 per cent above the prevailing renewable energy tariffs of Rs 2.50-2.80/kWh," said Shah.

Four new projects with a total capacity of 8.8GW began construction in India in 2019, and all have received funding from the PFC and the REC.

"IEEFA questions as to how the PFC can expect to get a viable total project return over the 40-year life of thermal power plants, given the uncompetitive tariffs these projects require, particularly in the light of rising financial distress at distribution companies (discoms) which are demanding ever-lower cost of procuring new power generation," said Shah.

The report further sheds light on PFC's asset impairment costs and provisioning cover for its non-performing assets.

The PFC and the REC both have materially increased their lendings to the renewable energy sector, in line with the government's long-term power sector objectives.

However, in FY2018/19, the PFC lent $1.2 bn to renewable energy projects -- only capturing less than one tenth of the market for renewable lending.

"Given the poor market share and the speed of the global energy transition, we recommend that the PFC should strategically pivot to lend more to support renewable capacity growth," added Shah.