Moody's Investors Service says that the power sector would continue to be a source of asset quality risk for public and private-sector banks in India if the poor financial profiles of state electricity board distribution companies (discoms) do not improve through further structural reforms.

''The poor financial health of discoms in India is one of the key factors weighing on the asset quality of the country's banks,'' says Srikanth Vadlamani, a Moody's vice president and senior analyst.

''So far, these problems have almost exclusively affected public-sector banks, which represent more than 70% of total banking system assets, and which are directly and indirectly exposed to the credit quality of discoms,'' adds Vadlamani.

''While private-sector banks have almost no direct exposure to discoms, they are exposed indirectly if problems with discoms affect the credit quality of other borrowers in the electricity supply chain, especially power-generating companies, which are also creditors of the discoms,'' says Vadlamani.