Photo: Mint
Photo: Mint

Rajasthan electricity board to pay minimum interest to lenders

Interest payment will help the board escape the bad loan tag and give it three months to arrive at a viable repayment plan

A repayment crisis at the Rajasthan state electricity board (SEB) has been temporarily averted after the utility agreed to pay a minimum pending interest to its lenders. The payment of minimum interest will help the Rajasthan SEB escape the bad loan tag and give it three months to come up with a viable repayment plan.

The decision came at a meeting between SEB representatives, lenders and finance ministry officials last week after bankers declined to consider any fresh restructuring of loans.

In this three-month period, Rajasthan SEB is expected to come up with a viable restructuring plan for short-term liabilities worth over 50,000 crore, which would be acceptable to the finance ministry, bankers and the Reserve Bank of India (RBI), according to two bankers familiar with the matter.

This would be the second restructuring plan for the state’s distribution companies (discoms) in under two years. Typically when an account is restructured for a second time, it is classified as a non-performing asset unless the regulator allows a special dispensation.

Bankers, however, are not keen to restructure the account again as the previous restructuring plan has not been successful.

“The current restructuring plan seems to already be failing. In this situation, approving a new plan does not seem feasible. The only way the financials of these discoms can improve is if the state takes some tough decisions by cutting transmission losses and raising tariffs," said the executive director of a public sector bank, who is one of the two bankers cited above.

Rajasthan’s principal secretary (energy department) Sanjay Malhotra did not respond to several calls seeking comment.

Owing to the weak financial health of power discoms across India, the United Progressive Alliance government had introduced the financial restructuring proposal (FRP) in October 2012.

Under the FRP, 50% of a SEB’s short-term liabilities would be restructured by lenders with a moratorium on principal repayment of three years; the rest of the debt would be converted to bonds guaranteed by respective state governments.

Last month, Rajasthan state government had floated a request for proposal (RFP) inviting bids from companies that can prepare debt restructuring plans for the state discoms.

During the last five years, all state-owned power discoms in Rajasthan have resorted to taking short-term working capital loans, owing to the growing demand for electricity. However, the inability to adequately increase tariffs had led to an accumulation of losses and short-term debt.

Together, the state’s discoms had outstanding short-term working capital loans of 52,402 crore as of 31 March.

Three creditors’ consortiums have an exposure to the state’s three discoms, namely Jaipur Vidyut Vitran Nigam Ltd, Ajmer Vidyut Vitran Nigam Ltd and Jodhpur Vidyut Vitran Nigam Ltd. Public sector lenders Central Bank of India, Punjab National Bank and Bank of Baroda lead the three consortiums. Other large lenders to these discoms include Rural Electrification Corp. Ltd and Power Finance Corp. Ltd.

As part of the ongoing discussions, the state has also requested lenders to extend the moratorium on principal loan repayment under FRP to five years from three years. A reduction in interest rate is also being sought. According to RFP, the average interest rate charged on these loans now stands at 12.75%, which leads to an annual interest burden of about 6,000 crore.

“The only thing that can give us some confidence now is if the RBI or the finance ministry give some special dispensation in this case. Until then, there is no question of new restructuring. They had requested for reducing interest rates, but we believe that the current rates are highly competitive in this situation," said the second banker quoted above.

“The ability to conduct independent assessments of infrastructure projects is lacking with banks today. They depend a lot on the borrower’s estimates and business projections for their lending decisions. If these projects are not viable in three to five years, then funding them may amount to throwing good amount after bad," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp.

In its Financial Stability Report released last week, RBI pointed out that banks had already restructured some 53,000 crore worth of debt by discoms under FRP.

“The moratorium period for repayment of the principal amounting to 430 billion ( 43,000 crore) ended by March 2015. Considering the inadequate fiscal space, it is quite likely that the state governments might not be in a position to repay the overdue principal/instalments in time, and banks may be forced to continue classifying these loans as SMA-2 (special mention accounts) as is being currently done on account of delayed servicing of interest," the RBI report said.