Power sector debt recast only a temporary measure: S&P

Standard & Poor's has said it expects no significant reforms in the Indian energy sector before the general elections, heightening concerns that this could keep India in line for a ratings downgrade.

The ratings agency said the restructuring of state electricity board loans in the power sector was a short-term correction while for oil subsidies, "the government was aware of the necessity for corrections" but expected that nothing major may happen "before the state elections or even a general election, next year".

Credit analyst at S&P, Takahira Ogawa said the delays have not, however, increased the risk factors for India than what it was already at.

S&P had issued an outlook for ratings downgrade for India in June this year. The key risks the agency had identified for the economy stemmed from the weakening of loan quality for banks as corporate results weakened and the Central government persisted with a high fiscal deficit.

Analysts from the agency made the comments at a conference call on the government's recent proposal to restructure about Rs 1,20,000 crore debt of state electricity boards.

"We believe a sustained improvement in the credit quality of distribution companies and greater private sector participation can provide a long-term solution to the country's power sector woes," said credit analyst Rajiv Vishwanathan.

The domestic banking sector has an exposure of about 7.5 per cent of its loan book to the power sector. This works out to about Rs 3,30,000 crore as on March, 2012. Outstanding loans to the state electricity boards comprise about a fourth of that amount.

The proposal envisages that a portion of these loans to the state boards will be restructured. About half of these loans will be transferred to the respective state governments, which would issue bonds against the papers adding the sweetener of a guarantee.

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