Despite the high exposure of public sector banks (PSBs) to the power and iron & steel sectors, analysts remain in a wait-and-watch mode.
While the alleged scams involving Syndicate Bank, Oriental Bank of Commerce (OBC) and Dena Bank took a toll on investor confidence in PSB stocks, Monday’s Supreme Court verdict on coal block allocations have dealt another blow.
The court had said coal block allocations between 1993 and 2010 had flouted norms, adding the 12 ultra mega power projects for which coal blocks were allocated through competitive bidding could mine coal from these blocks, but only for power projects these were meant for.
According to a report by Karvy, as of June this year, the banking sector had exposure of Rs 5 lakh crore (8.8 per cent of non-food credit) to the power sector, against 4.3 per cent in March 2008.
“During the same period, the banks financed many new power projects, which might get negatively impacted by the court verdict. Possible cancellation of allotted coal blocks to these projects might adversely impact the chances of recovery of these loans. If these projects fail to take off, banks will have to either write-off or classify these as NPAs (non-performing assets). Even if the court asks the government to re-allocate these blocks, it will mean substantial delays in project and result in slippages and restructuring of loans to these projects,” said Asutosh Kumar Mishra, an analyst with Karvy.
“Therefore, we expect part of this exposure to turn into NPAs through the next 18 months, as many of these projects will become unviable. We maintain our cautious view on the sector, especially on PSBs, which have relatively higher exposure to the sector,” he adds.
Impact assessment
Most PSB stocks fell on Tuesday, with the CNX PSU index slipping 1.3 per cent in intra-day trade, against a 0.3 per cent fall in the CNX Nifty. Top losers OBC, Allahabad Bank, Bank of India, Union Bank of India and Punjab National Bank (PNB) lost two-four per cent.
As clarity on the matter will emerge only after SC’s final verdict on September 1, analysts remain in a wait-and-watch mode.
Vaibhav Agrawal, vice-president (research-banking) at Angel Broking, says: “All PSU banks have exposure of three-five per cent of their loans to the steel sector. But before we assess the final impact, we need to wait and watch the final outcome on September 1 — whether the court de-allocate or impose fines. Right now, even the number of projects that might be affected is difficult to assess. As of June 27 this year, the overall exposure of banks to the iron & steel sector was Rs 2.65 lakh crore; but not all of this will come under risk. What percentage and how it is impacted will be clear once there is clarity on what action the SC takes.”
Rikesh Parikh, vice-president (equities), Motilal Oswal Securities, said, “What happens to the coal block allocations is still a question, as the final hearing on this issue is on September 1. Markets usually pre-empt and react negatively. However, one has to assess the impact after the final verdict and on a case-to-case basis. Let’s wait and see how harsh the verdict is.”
Agrawal said exposure to the power sector, though bigger than the exposure to the iron & steel sector, wouldn’t be impacted much by the court ruling. “I think more than half the banks’ exposure here (power) will be to state electricity boards, state generation companies, etc, which have nothing to do with coal at all,” he said.
