India plans to restructure part of the debt that state-owned power distribution companies owe to financial institutions, in a bid to reform the power sector and improve capacity.
According to S&P, Indian banks have a total exposure to the overall power sector of Rs 3.3 lakh crore, which equals 7.2 per cent of all their loans.
The restructuring could provide the loss-making distribution companies temporary relief and help them to cover costs in the short-term, S&P said, though it warned that India needs to provide more lasting solutions to its power problems.
India last month experienced one of the world's worst blackouts following a breakdown of transmission grids, and rolling power cuts are part of daily life.
The proposed debt restructuring "does not significantly affect our sovereign rating on India," S&P said in its report.
S&P roiled domestic markets in April when it cut India's sovereign outlook to "negative", putting at risk the country's current rating of "BBB-", the lowest investment-grade rating by the agency.
India needs to improve the credit quality of the distributors and allow greater private sector participation in power transmission and distribution in order to provide a long-term solution to power shortages, the agency said.
"The cost of doing business in India could increase if the cycle of high system inefficiencies, technical and commercial losses, and under investment in capacity continues," S&P said.
"This could in turn affect the country's growth prospects in the long run and weigh on the sovereign rating on India."
Copyright Thomson Reuters 2012