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Friday, September 28, 2012
Restructuring OF Loan Can Only Postpone Collapse of Banks
Debt recast package for SEBs soon: Moily
Revamp will involve modifying debt repayment schedule, says minister
News collected from LIVE MINT
Mumbai: The much-awaited debt recast package for state electricity boards (SEBs) may soon receive government approval.
“We have worked out some financial package and also a debt restructuring package that will be approved by the Cabinet in a week or two,” power minister M. Veerappa Moily told reporters on the sidelines of a Confederation of Indian Industry (CII) corporate governance summit in Mumbai on Tuesday.
Moily said the government had devised the package in consultation with the states and distribution companies (discoms).
Speaking separately to reporters at the state guest house in Mumbai on Tuesday, he also assured that “the recent cancellations of coal blocks will not affect power generation in the country”.
State utilities, which buy power from the generation companies and distribute them, are caught in a vicious trap as political pressure often prevents them from raising electricity tariffs even though they have to buy power at a higher price.
Having accumulated losses for years now, they have emerged as a huge counter-party risk for banks that have provided them loans and for power producers, which depend on them for offtake.
Indian banks’ loans outstanding to the power sector stood at Rs.3.4 trillion as of July, posting an increase of 18.7% from Rs.2.9 trillion in July 2011, according to the data with banking regulator Reserve Bank of India (RBI). Overall bank loans grew by only 17%.
A 30 August statement by rating agency Crisil Ltd, the local unit of Standard and Poor’s (S&P), said the “exacerbating refinancing and liquidity pressure, especially for the state power utilities,” could lead to restructuring of nearly Rs.1.5 trillion of which Rs.60,000 crore worth of loans had been restructured so far by banks.
“Discoms have an asset-liability mismatch,” said the chairman of a state-run bank, who did not want to be named. He added that internally the process of debt recast was already underway in his bank. “The government is finalizing the guidelines right now for everyone.”
Sector experts, however, caution that the government’s much-anticipated proposal may only go so far. They argue there will have to be “sufficient tariff increases” to make this sustainable.
Pointing out that the “restructuring was imminent, otherwise these loans given by banks would lead to NPAs (non-performing assets),” Seshan Balakrishnan, director, infrastructure practice at consultancyErnst and Young India Pvt. Ltd, said a lot depended on “the milestones in the key packages” laid down by the government and “how well the discoms follow them”.
About half of the loans could be transferred to the respective state governments through guarantees on bonds that the discoms will issue, a 7 September report by S&P had stated calling the proposal “a salve, not a cure”.
SEBs would only service the interest on rescheduled loans and state governments would service interest on the bonds. Moratoriums of up to three years on repayment of principal could come by along with specific targets for discoms to reduce transmission and distribution losses.
“This is again a temporary fix,” said Balakrishnan explaining that problems would continue until the discoms were “unhindered in their ability to raise tariffs”.
SBICAP Securities Ltd’s lead sector analyst Rabindranath Nayak said this “would provide relief to discoms and banks” but states may differ in their ability to shoulder their share of the burden. States with lesser revenues “may need some more central assistance,” he said.
Bombay Stock Exchange’s power Index gained 0.88% on Tuesday to close at 1,938.70 points after Moily’s comments, outperforming the benchmark Sensex, which lost 0.25%. The power index has gained 7.95% in 2012, while the Sensex has gained 19.68%.