India’s banking sector is staring at potential dud assets worth $38 billion (~₹2,470 billion) from the power sector, according to a latest report released by the Bank of America and Merrill Lynch.

This comes at a time when the country is already grappling with an enormous amount of bad loans.

“Of the $178 billion (~₹11,571 billion) of debt of the power sector, $53 billion (~₹3,445 billion) are already under stress (primarily to the generation sector) and of this, as much as $38 billion have the potential of being written-off as bad loans,” the Bank of America-Merrill Lynch report stated.

According to news agency Press Trust of India (PTI), the report is based on the fact that as much as 71 GW of private sector coal-based projects are facing bankruptcy filings at various National Company Law Tribunals (NCLTs).

The report further breaks down the distribution of the $178 billion (~₹11,571 billion) loan. According to the report, which has been authored by Amish Shah and Sriharsh Singh, the distribution companies are dealing with a burden of $65 billion (~₹4,225 billion), generation companies have a load of $77 billion (~₹5,006 billion), and transmission firms have a debt burden of $36 billion.

The report further asserts that of the $53 billion (~₹3,445 billion) of stressed loans, a staggering amount of $50 billion (~₹3,250 billion) belong to the power generation sector alone.

Of this $178 billion (~₹11,571 billion) debt mountain, banks have the largest at 53 percent of the total loans, followed by non-banking finance companies (NBFCs) at 35 percent and the balance from the states.

The report, however, hails the government’s Ujwal DISCOM Assurance Yojana (UDAY) program, saying that the loans to the distribution sector, which were earlier stressed, are now better off as they have been given quasi-state guarantees and restructuring under the initiative.

The UDAY program was launched by the Ministry of Power in November 2015 to target the debt reduction of DISCOMs. The objective of the program is aimed at increasing the financial viability of the distribution companies (DISCOMs) in the country which are reeling under the burden of debts.

In January 2018, Mercom reported that the Distribution Companies (DISCOMs) in states that joined the Ujwal DISCOM Assurance Yojana (UDAY) program have cut down their financial losses from ₹515.9 billion (~$8.14 billion) in the Financial Year (FY) 2016 to ₹348.3 billion (~$5.49 billion) in 2017.

In August 2017, Mercom reported that the states participating in the UDAY program have taken over debt of ₹2.09 trillion (~$32.5 billion) from their DISCOMs. This is almost half of the ₹4.3 trillion (~$64 billion) of debt by state DISCOMs.

The Bank of America-Merrill Lynch report added that about 43 percent of loans have been extended to the power generation sector, followed by distribution at 37 percent and transmission at 20 percent.

The report further noted that the $116 billion (~₹7,541 billion) national power utilities lose around $9 billion annually but can turnaround without hiking consumer tariffs and also continue to offer the present average subsidy of two percent if the many of its cost-inefficiencies are resolved.