India's largest rating agency, Crisil Ltd, lowered its ratings on 12 power companies in the eight months ended November, compared with 14 companies in the previous fiscal year. Care Ratings downgraded seven firms between April and November, against seven in the whole of last year.
In the same period, Icra Ltd, in which Moody's Investors Service is the largest shareholder, downgraded at least 23 companies in the power and allied sectors, compared with 19 companies last year.
"The key reasons for the downgrade include stretched receivables, delays in project execution, and debt-funded acquisitions," Crisil said in an emailed response to a query on the reasons behind the downgrades.
A low rating restricts the ability of a company to access easy bank money and weakens chances of a good pricing. Typically, bank loans contribute more than 60% of the funds of power companies.
Banks lend to power firms at up to 2% above their minimum lending rate for maturities ranging from one to seven years.
The move by credit assessors assumes grim significance as the finance ministry has cautioned banks against increasing their exposure to power utilities, including distribution companies, unless these firms pare losses and raise tariffs.
"The lower the rating, the higher the cost for money (for borrower firms)," the chairman of a public sector bank said, declining to be identified. "Definitely, it is a tough sector to work with now."
The executive director of another state-run bank, who too declined to be named, said his bank is not considering fresh disbursals to power firms. The downgrades clearly mean further difficulties for power firms in accessing bank loans, the official said.
Officials at rating agencies said more downgrades are likely this fiscal due to continuing stress in the sector.
"There are clearly concerns on the sector which emanate from the deteriorating financial position of the state distribution utilities and issues in availability of fuel, primarily coal but also natural gas," said Anjan Ghosh, head of corporate sector ratings, Icra.
"As far as the state utilities are concerned, possibly the most important reason has been the lack of tariff hikes and inadequate progress in terms of reducing distribution losses," Ghosh said.
India's power sector is facing a crisis due to multiple reasons including a sharp rise in coal prices, and delays in land acquisition and environmental clearances, leading to delayed project implementation and escalating losses and debts. Besides, tariff revisions and reforms have been absent.
Amod Khanorkar, general manager and rating head at Care, too, said more downgrades of power firms are likely in the approaching months. "The tilt is more towards downgrades," Khanorkar said.
Crisil estimates losses in the power distribution segment to have mounted to Rs. 350-400 billion in 2010-11, nearly doubling from 2008-09 levels. It estimates the cumulative debt of state power utilities, including distribution entities, at Rs. 3 trillion as at end-March.
Power sector officials blame the inaction of the Union and state governments on policy reforms for the plight of the sector. "The biggest problem power sector is facing is that of the fuel supply, and problem of fuel supply is because of Coal India Ltd's inability to supply coal to power sector," said Ashok Kumar Khurana, director general of the Association of Power Producers. Indian banks have a sizable exposure to the power sector.
According to Reserve Bank of India data, bank loans outstanding to the power sector stood at Rs. 3.02 trillion on 21 October, compared with Rs. 2.32 trillion a year earlier.
Anish De, Asia chief executive at global energy consultancy Mercados Energy Markets, said the rating agencies have woken up at least six months late. "In fact, things have started looking up in the power sector. States like Karnataka, Rajasthan, Delhi, Tamil Nadu, etc., have carried out substantial tariff increase," De said. "So now is actually time to upgrade the rating."
Shares of power companies have seen a tepid response from investors; the power index on BSE Ltd has declined 31% over the past year, ending at 2,021.09 points on 7 December, dropping faster than the Sensex's 15% fall in that time.