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Photo: Indranil Bhoumik/Mint
Photo: Indranil Bhoumik/Mint

Centre proposes to convert 75% of loans to discoms into govt bonds

By March 2016, 50% of outstanding debt will be converted to state govt securities, while the remaining 25% will be converted by March 2017

Bankers may be asked to convert 75% of their outstanding loans to power distribution companies (discoms) into state government bonds, while reducing the lending rate on the remaining loans, according to a proposal discussed between the power ministry and bankers on Friday.

The meeting was part of ongoing negotiations between different stakeholders to find a resolution to the heavy debt on the books of state electricity boards.

With the financial condition of some of these electricity boards seen as precarious, the power ministry has been in talks with state governments and banks to find a way to restructure the debt. A similar restructuring in 2012 failed to work.

At a meeting with senior bankers on Friday, the government proposed that 75% of the outstanding debt, as of September 2015, be converted to state government bonds at a coupon of 8%. This will be done in two phases. By March 2016, 50% of the outstanding debt will be converted to state government securities, while the remaining 25% will be converted by March 2017. Mint has reviewed the key highlights of the proposal circulated among bankers.

“This conversion will happen through the issue of special purpose bonds outside the FRBM (Fiscal Responsibility and Budget Management Act, 2003) limit. So, basically, the discoms’ debt will be transferred from our loan books to our investment books as state government bonds," a senior official at a large public sector bank said on condition of anonymity as the discussions are confidential.

The remaining 25% of debt will remain as loans at an interest rate 10 basis points over the base lending rate, as per the proposal. A basis point is one-hundredth of a percentage point.

“The average interest rate on these loans is about 11-12% and reduction of interest will be a hit that the banking system will have to take. Of course, this hit is much lower as compared to the provisions we would have had to make if these loans failed," the banker said.

State electricity boards (SEBs), which control the discoms in their respective states, owe nearly 4 trillion in debt to the banking system. Of this, a majority of the debt is held by utilities in eight states, namely, Rajasthan, Uttar Pradesh, Haryana, Tamil Nadu, Andhra Pradesh, Jharkhand, Bihar and Telangana.

To ensure that state governments have more skin in the game, the centre has also proposed to count discom losses as part of a state’s fiscal deficit.

At the end of financial year 2017-18, about 10% of such losses will be included in the state’s fiscal deficit, and by March 2022, 100% losses made by discoms will be tagged to the fiscal deficit, according to the proposal.

“When the fiscal deficit numbers of these states start getting affected, they will be more incli-ned to cutting power losses and pushing for an increase in tariff," the banker cited above said.

The proposal floated by the government also puts a cap on future borrowings of these discoms, with fresh working capital loans limited to only 33% of a dicom’s annual revenue. This will push these companies to raise tariffs and cut losses, to borrow in a more efficient manner.

The proposal will go through one final round of discussions this week, where chiefs of some of the largest lenders will meet senior government officials.

The new restructuring package comes just about three years after a previous attempt failed. In September 2012, the United Progressive Alliance government finalized a Financial Restructuring Plan (FRP) to solve the troubles at state utilities.

The plan, implemented in October 2013, involved restructuring 50% of a state utility’s short-term liabilities by lenders with a moratorium on principal repayment of three years. The rest of the debt was converted to bonds guaranteed by respective state governments.

However, inadequate increases in tariff and a high interest cost burden ensured that the stress in the state utilities did not reduce. In June, the Rajasthan SEB called for bids from debt restructuring experts to prepare a fresh restructuring proposal for its debt of more than 50,000 crore.

According to an analyst, any restructuring plan will only work if the structural problems of transmission losses and tariff setting are resolved.

“The proposal will have to address the large cash losses that these companies make every year. These losses can be addres-sed by either reducing transmission losses, raising tariffs or cutting down on power supply. So, it will be of material importance to ensure that states cut losses without compromising on adequate power supply," said Vibha Batra, senior vice-president at credit rating agency ICRA Ltd.

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