Short-circuiting banks

With large defaults beginning to take place in the power sector—overdues in Karnataka are R5,500 crore and R43,000 crore in Tamil Nadu—the first to get hit are the country’s banks. According to credit-rating firm Crisil, roughly R56,000 crore of loans, representing about 12% of all loans to the power sector (power sector loans, in turn, comprise about 7.8% of all bank loans, up from around 4.3% in FY08) are in danger of going bad thanks to power tariffs rising much slower than costs—while aggregate costs of power supply between 2007 and 2009 rose 16.5%, according to Standard Chartered equity research, power tariffs rose just 6.5%. Though tariffs have risen since, the backlog is huge. And it’s likely to get worse.

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