The state electricity boards’ debt restructuring plan has to be accompanied by more liabilities to be taken on by the states. Most states have already breached their targets under the Fiscal Responsibility Act
The Cabinet Committee on Economic Affairs (CCEA) recently approved the scheme for restructuring the debt of state distribution companies (Discoms). The scheme lists various measures required to be taken by Discoms and state governments for achieving the financial turnaround of the Discoms by restructuring their debts with support through a Transitional Finance Mechanism by the central government. The scheme will remain open up to 31 December 2012, unless extended by the Government of India (GOI), the ministry of power said. The scheme announced by the central government to state power distribution companies is an attempt to restore power purchasing capacity of the debt-ridden Discoms and enable banks to recover their loans.
However according to CARE Research, states involved in the current restructuring plan may find it difficult to adhere to their respective fiscal deficit limits given the acceptance of weaker states in the central restructuring package and the doubts over the tariff hike momentum given the limited room for states given bulging subsidies and anticipated slower revenue growth.
The restructuring would be beneficial for the short term, over the long-term functional autonomy would be essential. The scheme requires the states to take over 50% of the short-term liabilities (STL) through issuance of special securities (non-SLR bonds) in favour of participating lenders in a phased manner, according to the fiscal limits available (under FRBM Act). The balance 50% needs to be restructured by the banks with a three-year moratorium. According to CARE Research, this may bring a short-term relief for the Discoms but in the long-term it will all depend on how the Discoms are able to raise tariffs and cut distribution. According to Nomura Research, as most states have ‘effectively’ breached their Fiscal Responsibility and Budget Management (FRBM) targets at present, getting immediate Statutory Liquidity Ratio (SLR) status for bonds issued by Discoms looks unlikely.
The impact on state governments will be huge as the previously off-balance-sheet commitments to SEBs now increasingly become part of their budgets. According to CARE Research the fiscal deficit of problem states (Punjab, Andhra Pradesh, Madhya Pradesh, Haryana, Rajasthan, Tamil Nadu and Uttar Pradesh) is already more than 2% of their respective Gross State Domestic Product (GSDP). As per the FRBM Act, state governments are mandated to maintain the fiscal deficit of around 3% of their GSDP (3.5% in case of Punjab). However, the fiscal deficit of the above-mentioned seven states is already between 2.1% to 2.98% (3.26% in case of Punjab) as per their financial year 2012-13 budgets. Thus, they have very limited fiscal room to absorb any more liabilities on their books. Of the seven stated only four would meet the required amount as per space available in the FRBM limit for FY2012-13.
With an expected decline in GDP growth impacting the revenues of states and centre, the situation may be more complex. The state governments would have to go in for additional new taxes/sale of assets to raise resources. However, with state elections due in Rajasthan and Madhya Pradesh in December 2013 and a general election due in 18 months, such revenue-raising measures seem difficult.
Underpaid subsidies and underestimated losses are a key concern for Discoms. The Shunglu Committee Report, which evaluated 15 state distribution companies. The components of “Other Current Assets” are highly ‘opaque’ with likely possibility of subsidy booked, but not received with higher proportion of agricultural losses (than accounted for) being hidden. The accumulated losses of the Discoms are estimated to be about Rs1.9 lakh crore as on 31 March 2011.
Most of the banks have already initiated the restructuring of advances on their own and according to CARE Research banks have already restructured around 45% of the total Discom advances in the past few quarters. The restructuring packages have reduced the asset quality concerns of banks along with a state guarantee on the Discom advances.
Although more clarity is awaited on the interest rate at which the bonds will be issued by the SEBs. According to Nomura research, 50% of the loans to get converted into Discom bonds are likely to attract the state government coupon rate (8.5%-9%), entailing a 5%-6% hit in the Net Present Value (NPV). The 50% loans restructured with three-year moratorium and five-year repayment will not attract an NPV hit if the coupon rates are maintained. However, it might attract 2% provisioning as per RBI norms. In the worst-case scenario, the overall haircut for banks could be in the range of 5%-6% excluding the mark-to-market impact.
