India’s banking crisis is really a power crisis

India’s government seems intent on abandoning good ideas for dealing with the country’s banking crisis and encouraging bad ones. Perhaps that shouldn’t be surprising, given that the bureaucrats don’t yet seem to have grappled with the real nature of the problem.
The latest terrible proposal for dealing with the bad loans weighing down India’s state-owned banks, which control more than two-thirds of deposits, is to create a “bad bank” — an asset-management company that would take stressed assets off their balance sheets. Naturally, the scheme emerged from a committee made up of the heads of India’s nationalised banks.
Ownership of the new company would be shared between banks and private investors. It would have to raise at least 1 trillion rupees (about $14.5 billion) for an alternative investment fund from various pools of capital in the private sector. Why so much? Because the company will have to act as a market maker for stressed assets that nobody wants, picking up 15 percent of an agreed-upon floor price.
This is the real issue. There are already quite a few private-sector asset-management companies lurking around now that India has finally instituted a real insolvency code. The problem isn’t that they don’t have enough money; it’s that not enough of the stressed assets being put on sale look good enough to buy.
The most intractable bad loans, the ones the bad bank is meant to deal with, are concentrated in one sector: power. In particular, Indian thermal plants are struggling.
A parliamentary subcommittee estimated earlier this year that 34,000 megawatts-worth of capacity is in trouble. Either nobody has signed up to buy power from these plants, rendering them unprofitable, or they don’t have access to subsidised coal.
In India, renewable energy now looks competitive with “zombie” thermal power plants in terms of cost, while new plants require government subsidies and favourable administrative decisions that bureaucrats are reluctant to provide.
The transition to a lower-carbon economy is a reality, even for countries like India where coal will still be the bedrock of power generation for decades to come and even if renewable energy is still unreliable for base-load power.
Given that this transition is real and happening, policymakers around the world must understand that carbon-based assets are a financial time bomb. In India, they look like they might torpedo the banking sector; elsewhere, they will pose other major threats to financial stability. It’s time for regulators to get serious about the knock-on effects of the world’s fight against climate change.

— Bloomberg

Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”