Water shortage may set off next bad loan wave

MUMBAI: With India continuing to face severe pressure on its water resources, a new report released by World Wide Fund for Nature (WWF) report outlined the increasing water risks for businesses that could lead to significant losses for the country’s banks.

Launched with the Indian Banks’ Associa-tion (IBA), the WWF report Hidden Risks and Untapped Opportunities: Water and the Indian Banking Sector provides evidence for why water presents a material risk for banks in India, particularly how water risks could lead to stranded assets in the power and agriculture sectors — the two sectors that account for the highest gross credit exposure of banks.

According to the report, a close to 40 per cent of the gross credit exposure of Indian banks is in sectors where water risks are significant.

Reeling under a crisis of non-performing loans with close to 10 per cent of gross-advances of the Indian banks facing a risk of non-payment from debtors, these risks can place further liquidity constraints on the already stressed balance sheets of banks in India.

It noted that water-related risks have the potential to limit production, disrupt supply chains, result in write-downs, create conflict with other water users and harm corporate reputations, which can lead to financial impacts for businesses and the banks that lend to them.

While water scarcity and drought is a major issue in agriculture and allied activities, the report noted that the power sector too require water for cooling (in the case of thermal and nuclear) and for direct power generation (in the case of hydrocarbons).

Though most power plants are assured sufficient water allocations by governments, there have been multiple instances where power plants have had to be partially or fully shut down due to water shortages. Bank’s exposure to agriculture stood at 13 per cent, power sector accounts for nearly 7 per cent of the advances.

In the basic metal and metal products sector (4.9 per cent of bank advan-ces), most ore abstraction processes use extensive volumes of water for either washing or cooling. Any water scarcity in the basin or the region can affect the operations.