Mumbai: The finance ministry and large bankers on Wednesday ended two days of discussions on a second debt restructuring package for the Rajasthan state electricity board (SEB) to cover short-term liabilities worth Rs50,000 crore, two bankers with knowledge of the matter said.

The discussions were to focus on the specifics of the stress in Rajasthan’s power distribution companies and strategies on how to deal with them.

Officials at the finance ministry and the Rajasthan SEB were also to take stock of the progress of the financial restructuring plan (FRP) provided by the then United Progressive Alliance government and implemented by the state two years ago.

Earlier this month, the state government invited bids for arranging debt restructuring for power companies through a request for proposal (RFP) on its website. The bids were to be sent in by 23 June.

In a 4 June interview with The Financial Express, Reserve Bank of India (RBI) governor Raghuram Rajansaid a second debt restructuring exercise would lead to non-performing asset (NPA) status for loans advanced to power discoms given that RBI withdrew regulatory forebearance on 31 March 2015.

Following the withdrawal, all restructured assets of banks are to be treated as NPAs, requiring creditors to set aside more money to cover the risk of default. Lenders, though, want RBI to make an exception in the case of SEBs.

“We don’t have an issue with approving a new round of restructuring as far as we are allowed to classify the asset as standard. There are significant exposures in these companies and we cannot afford to have such large NPAs on our books," said the executive director at a public sector bank before the conclusion of the talks on Wednesday. He spoke on conditions of anonymity as he is not authorized to speak to the media.

During the last five years, all state-owned power firms in Rajasthan have resorted to taking short-term working capital loans.

Rajasthan power discoms have the highest exposure to short-term working capital loans from banks and financial institutions, owing to growing demand for electricity, but at the same time they have been unable to increase tariffs adequately, according to background information in RFP.

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

Three creditors’ consortiums have exposures 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 Bankand Bank of Barodalead the three consortiums. Other large lenders include Rural Electrification Corp. Ltdand Power Finance Corp. Ltd

“We can’t just pull the plug on these loans because they have problems in repayments. Over the last one year, the state has shown its willingness to raise power tariffs and cut its losses. Unfortunately the moratorium of three years proved to be too low for these companies since the problems are much deep-rooted, and require a longer period for improvement," said a senior official at another public sector bank which has exposure to discoms in Rajasthan. The official didn’t want to be named.

In an interview to CNBC-TV18 on Tuesday, Rajasthan state government’s power secretary Sanjay Malhotrasaid that apart from restructuring of short-term liabilities, discoms are also seeking a refinancing scheme and reduction of interest rates.

The state has also requested lenders to increase the moratorium on principal loan repayment under FRP to five years from three years.

According to Rajasthan’s debt restructuring proposal, the average interest rate charged on these loans now stands at 12.75% which is too high for the discoms, creating a large interest burden to the tune of about 6,000 crore.

Under FRP, which was first introduced in October 2012 and implemented in 2013, 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.

According to the second banker cited above, a few other states like Haryana and Uttar Pradesh are also facing stress in the implementation of their FRPs due to high transmission and distribution losses, although they haven’t sought a second round of restructuring yet.

“For such a large debt amount, we cannot rule out a special dispensation by the regulator. However, since the loans are guaranteed by the state government, there should not be a problem with another round of restructuring. However, debt restructuring is like temporary medication for a much deeper illness. The state government will have to take steps to reduce debt burden of these distribution companies through multiple means. Some options are to convert part of the debt to equity, reducing AT&C (aggregate technical and commercial) losses by improving efficient power distribution and bringing tariffs at par with the cost of producing power," said Vibha Batra, senior vice-president at credit rating agency Icra Ltd.

The power sector has been a major pain point for most public sector banks owing to the economic slowdown and the reluctance of state governments to increase customer tariffs even though the price of producing power has gone up significantly.

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