Boston, MA -- (SBWIRE) -- 07/31/2012 -- BMI View: Over the recent years, India's commercial banks have substantially increased their exposure to the country's power sector. While it may be a prudent move given the long-term energy needs of the second most populous country in the world, we highlight that over the short term, banks with a particularly heavy exposure to the power sector will likely underperform given the various difficulties the entire sector is currently facing (such as the current shortage of coal). Over the past few years, we have witnessed a strong discernable trend in India's commercial banks - that of increasing exposure to the country's power sector. As seen from the accompanying chart, credit to the sector (as a percentage of total credit to industries) has skyrocketed to 17.0% as of December 2011, from a low of 10.5% in August 2008. While the growth of credit to the sector has slowed significantly since peaking in January 2010 (at 58.7% y-o-y), we note that it still remains considerably elevated, with the latest figure showing growth of 28.2% in December. The total amount of outstanding credit to the sector stood at INR3,154.4bn by the end of last year - approximately four times more than the amount in mid- 2007. To be sure, India's hunger for energy suggests to us that the banks' increasing exposure to the power sector should pay off over the long run. Indeed, our infrastructure team projects electricity generation to grow at an average annual rate of 6.7% over the next decade (2012-2021), a few percentage points higher than the 5.6% average growth rate achieved over the past ten years. Similarly, the team expects electricity India Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 32 consumption to increase at an average clip of 6.8% annually from 2012 to 2021, which again, represents a slight increase from the consumption growth recorded over the preceding decade. Harmful Over The Short Term Having said that, over the short term, we believe that rapid increase in exposure could play out negatively, given the difficulties that the power sector is currently facing. According to our infrastructure team, one of the key issues that continue to place pressure on the sector's margins is the shortage of coal, due primarily to lacklustre domestic production. Therefore, power companies have had to rely more on expensive imports to compensate for the domestic shortfall. Adding this to the relative inelasticity of electricity prices, it is unsurprising that production shortfalls and power project delays remain extensive. Furthermore, India's business environment continues to cause problems, with bureaucratic inefficiencies, policy uncertainty, and environmental concerns (in particular, the adverse public opinion towards nuclear power). As such, the risk of repayment delays and bad debts remain acute. Net income margins of Adani Power, Tata Power, and NTPC have already been falling. Exposure Spread Out We note th

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