NEW DELHI, July 23: Slowdown in industrial and export growth coupled with an unstable political environment, ``where economic policies lack direction'' have led to an unfavourable outlook for India's credit rating, international rating agency Moody has said.

``India still has a high dependence on imported oil which may lead to deterioration in the current and trade accounts,'' Moody's said while assessing the public sector Power Finance Corporation's (PFC) proposed $100 million eurobonds.

India's sovereign rating is under pressure, given a slowdown in growth, both domestic and export, and this combined with ``an unstable political environment where economic policies lack direction have led to an unfavourable outlook for the rating of India,'' Moody's said.

Portraying a dismal picture of India's power scenario, Moody's said the main constraint on better financial performance was the low electricity tariffs charged to the agricultural and other sectors of the population, representing the lion's share of power consumption.

``The cost of electricity is a sensitive social issue and the political will to tackle the problem has been absent,'' it said while assigning the country rating to PFC, which has assets worth $ 1.8 billion. Stating that PFC's foreign currency debt rating could not exceed India's foreign currency debt rating, Moody's said ``the downward pressure of India's rating could also indirectly affect Power Finannce Corporation''.

In addition, the rating takes into account the current weak status of the power sector in India and the negative impact this may have on PFC's asset quality.

The rating of `BAA3' is placed at the Indian sovereign ceiling for long term foreign currency denominated debt and in India only a few financial institutions like the Industrial Development Bank (IDBI), Industrial Finance Corporation (IFCI) and Industrial Credit and Investment Bank (ICICI) have received such rating.

Moody's also observed that even though PFC offered cheaper funding to its borrowers than other financial institutions, its net interestmargins have been wide due to lower cost of funds.

``The rating is placed at debt and reflects PFC's strong capital position and its good profitability as well as its importance in the implementation of government policy in the indian power sector,'' the rating agency said.

PFC, which was incorporated as a limited liability company in 1986 and commenced operations in 1988, was established as a specialised financial institution for funding and development of the power sector. On the indian power industry, Moody's said it was plagued with problems distressing the financial performance of the state utilities, state electricity boards and other entities involved in generation, transmission and distribution of power.

The financial condition of state utilities is tormented by significant inefficiencies, including high administration costs, transmission losses, unutilised capacity and loss of power due to corruption-related theft, it said.

Moody's said PFC's asset quality was enhanced by state government guarantees attached to each loan to state utilities.

``In addition to the pressures for prompt repayment exercised by the central and state governments, state utilities understand the need to maintain a good working relationship with PFC for their future funding,'' it said.

Profitability of pfc has been healthy and stable with an average return on assets of about four per cent for the last five years, mainly driven by high net interest margins and low administrative expenses, Moody's said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.