In a toughening of stand on their exposure to the power sector, banks have started refusing to disburse sanctioned loans to generation companies unless these firms are able to convince them about a steady supply of coal.
Fresh loan sanctions to power companies are also shrinking due to mounting worries on the financial positions of these corporations and their ability to repay existing debt.
"None of the loans were sanctioned by banks without a tie-up for coal.
"The tie-up was a letter, which gave in-principle guarantee on the allotment of coal.
But, those were only in-principle letters and not commitments," said K R Kamath, chairman and managing director of Punjab National Bank.
"There are loans that have been sanctioned on the basis of these letters but have not been disbursed. The disbursements will not happen unless we see coal," he added.
PNB, the second largest government owned bank in the country, had lent Rs 12,283 crore (Rs 122.83 billion) to power companies as of September-end.
The lender has already restructured Rs 2,553 crore (Rs 25.53 billion) of loans given in this sector.
"It will be very difficult to disburse loans without addressing the linkage to coal," said Bhaskar Sen, chairman and managing director of United Bank of India.
"The Kolkata-based lender has given Rs 5,700 crore (Rs 57 billion) of loans to power companies.
According to the Central Electricity Authority, coal requirement was estimated around 31.5 million tonnes in September.
However, only 24.9 million tonnes was made available to thermal power stations during the month.
Thermal power stations suffered a shortfall in generation exceeding 100
As of end September, 31 thermal power stations had 'critical' stock, including 21 stations with 'super critical' stock.
Excessive rain, labour unrest and transportation bottlenecks are the main reasons for a shortfall in coal output.
During the current financial year, the anticipated gap between the requirement and availability of domestic coal is estimated around 54 million tonnes.
According to Nupur Mitra, chairperson and managing director of Dena Bank, the major issue with power generation companies is the availability of coal.
"We have to take corrective steps to prevent a significant deterioration in the quality of loans. It remains a challenge," she said.
The government also appears worried on the quality of bank loans to power companies.
"The Indian banking system is also exposed to some sectors of the economy such as power and aviation which are not doing well.
"Non-performing assets in these areas will need a continuous watch by banks," C Rangarajan, chairman of the economic advisory council to the Prime Minister, said in a recent conference.
Power companies have also approached lenders to restructure existing debt, to reduce the pressure on their cash flows.
Banks, however, are insisting power companies provide a road map on how they plan to address the challenges, including backward linkages with coal suppliers.
"We have asked them to come out with a holistic plan,"said M D Mallya, chairman and managing director of Bank of Baroda. The bank has given Rs 4,000 crore (Rs 40 billion) in loans to power companies.