Editorial 1 : Energy Churn Ahead

Context: Gas price rise and Trump’s expected policies

Introduction: The City Gas Distribution (CGD) sector is currently navigating several challenges, leading to increased reliance on costlier gas sources and are impacting the sector's profitability and competitiveness.

Factors Impacting the City Gas Distribution (CGD) sector

• Reduction in APM Gas Allocation: Sharp cut in the allocation of gas supplied under the administered price mechanism (APM) for the priority sectors — domestic piped natural gas (D-PNG) and compressed natural gas (CNG).
  • The APM gas allocation for these segments has reduced from 72% in the second quarter of the financial year to 44% effective from November 16.
  • This will compel players to rely on higher-cost alternate gas sources such as high-pressure high temperature (HPHT) gas or imported regasified liquified natural gas (RLNG), which costs one-and-a-half and two times respectively of the APM gas costs.
• Rising Gas Cost
  • The higher share of HPHT and RLNG will likely increase the gas costs of players in the priority segment by around Rs 5.0 per standard cubic metre (scm) or Rs 7 per kg.
  • Considering that D-PNG and CNG segments account for two-thirds of the sector’s volumes, this will significantly impact the overall profitability of players.
• Price Sensitivity to Crude Oil
  • With RLNG and HPHT gas being linked to crude prices, the current crude prices of $70-75 per barrel only marginally offset the cost impact.
  • Expected pro-drilling policies in the US may further lower diesel prices, reducing CNG's cost advantage.

Challenges in Key Segments

• Compressed Natural Gas (CNG)
  • Competition with Diesel: Cost competitiveness of CNG against diesel has been steadily declining.
    • Any diesel price reduction will further narrow CNG's edge.
  • In three-wheeler front that accounts for one-third of CNG consumption, new registrations for CNG vehicles have already flattened.
  • Buses which account for 7% of CNG volumes will experience faster electric adoption given the PM e-Bus seva scheme in several cities.
  • Slowing CNG Growth: CNG volume growth has slowed to 11% in the first half of FY2024.
• Commercial and Industrial (C&I) Segment
  • Accounts for one-third of CGD volumes.
  • Highly price-sensitive:
    • CNG consumption in the C&I segment declined by 25% in FY2023 due to higher RLNG prices.
    • Competing fuels like propane have gained competitiveness.

Way Forward: Opportunities in the Changing CGD Landscape

• Consolidation Potential: The challenging environment presents opportunities for larger, financially stable players to acquire smaller, struggling entities.
• Adaptation to Market Dynamics: Companies that optimize operations and diversify supply sources can emerge stronger in the long term.
• Transition to Clean Energy: Adoption of electric alternatives, particularly in the bus segment, signals a shift in the sector’s focus toward sustainable energy solutions.

Conclusion

The City Gas Distribution is facing significant challenges from rising gas costs, reduced APM allocations, and competitive pressures. While larger players with robust financials are better positioned to endure these challenges, smaller entities are at risk of being acquired. Consolidation is inevitable as the sector evolves to adapt to market dynamics.

Editorial 2 : In Good Health

Context: Indian banking system

Introduction: The Indian banking system continues to record improvement across several parameters.

Improvements in the Indian Banking System

• Reduction in Bad Loans
  • Non-performing assets (NPAs) have fallen to a 12-year low of 2.6% in September 2024.
  • Improvement observed across all sectors, indicating enhanced asset quality.
• Increased Profitability: Banks have reported a healthy rise in profits, showcasing better operational efficiency.
• High Provision Coverage and Strong Capital Position
  • Provision coverage ratios remain robust.
  • Banks are well-capitalized, with only four banks falling short of the minimum capital requirement in adverse stress test scenarios.
• Resilience to Macroeconomic Challenges: Stress tests conducted by the RBI suggest that banks can withstand adverse macroeconomic conditions with minimal impact on capital adequacy.

Emerging Concerns in the Banking Sector

• Stress in Unsecured Retail Loan Book
  • Steep rise in write-offs in the unsecured loan segment.
  • Over 50% of new bad loans in the retail segment originate from slippages in unsecured loans.
  • Concerns over dilution in underwriting standards and possible masking of worsening asset quality through higher write-offs.
• Stress in the Microfinance Sector
  • Rising share of stressed loans among low-income households.
  • High impairment among borrowers with multiple loans.
  • Growing indebtedness evidenced by an increase in borrowers with loans from four or more lenders.
• Consumer Credit and Household Stress
  • Personal loans under ₹50,000:
    • 11% of these loans are overdue.
    • 60% of borrowers availed more than three loans in the current financial year.
• Rising leverage among households indicates repayment stress.
• Gold Loan NPAs: Increased by 30% from ₹5,149 crore in March 2024 to ₹6,696 crore in June 2024.

Way Forward and Conclusion

• The Indian banking system has made significant strides in improving its asset quality, profitability, and resilience.
• However, emerging areas of concern such as stress in the unsecured retail and microfinance segments, rising household leverage, and vulnerabilities in corporate and external borrowing. These require continuous monitoring and proactive measures.
• While the sector is better placed to handle macroeconomic shocks, addressing these pockets of stress is critical to sustaining long-term stability and growth.
  

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