 "SEB losses holding back power sector reforms")
The Financial Stability Report highlights the fault lines in the banking system with the most glaring being in the power sector. Though the power ministry has been credited for being one of the most efficient ministries in the Narendra Modi government, the sector continues to be in stress.
As per the report, a whopping Rs 53,000-crore exposure of Indian banks to seven state electricity boards (SEBs) has a “very high probability” of turning into non-performing assets (NPAs) in the quarter ending September. These loans were restructured in 2012, with a three-year moratorium for the principal amount of Rs 43,000 crore. If distribution companies fail to pay interest and/or the principal by June 30 (90 days from the date the moratorium ended), these will turn into NPAs.
Just as the report was made public by the Reserve Bank of India (RBI), finance ministry officials and bankers concluded discussions on a second debt-restructuring package for the Rajasthan SEB. The Rajasthan SEB alone has outstanding short-term working capital loans to the tune of Rs 52,400 crore as of March 31, 2015, which is the highest exposure among SEBs.
The problem with such restructuring is that the RBI has indicated that the second debt restructuring would lead to non-performing asset (NPA) status for such loans.
According to Quant Research, most of the bankers would be willing to allow fresh quantum of restructuring due to state government guarantees attached to it though none of them would be willing to undertake higher quantum of provisions considering their weak balance sheets and declining profitability trends. There is a higher probability of government intervention in such case and hence probability of RBI allowing this restructuring as an exception would remain higher.
According to Quant Research, most of the bankers would be willing to allow fresh quantum of restructuring due to state government guarantees attached to it though none of them would be willing to undertake higher quantum of provisions considering their weak balance sheets and declining profitability trends. There is a higher probability of government intervention in such case and hence probability of RBI allowing this restructuring as an exception would remain higher.
But will restructuring solve the problem for SEBs. Let’s look at the ground realities. Power ministry has done a commendable job handling the supply side issues of the power sector. Coal inventory which used to be a perennial problem has been tackled by improving logistics and supply of railway rakes.
As per a JP Morgan report, All-India coal plant inventory is touching new peaks and presently stands at around 20 days, almost at normative levels prescribed by the CEA (Central Electrical Authority). Coal India’s production and dispatch increased by 12% and 7%, respectively, in May 2015 over the previous month.
As per a JP Morgan report, All-India coal plant inventory is touching new peaks and presently stands at around 20 days, almost at normative levels prescribed by the CEA (Central Electrical Authority). Coal India’s production and dispatch increased by 12% and 7%, respectively, in May 2015 over the previous month.
While the supply issue has been tackled, the problem in the demand side continues. UBS has highlighted the problem of the sector by pointing out that discoms are finding it difficult to buy power despite electricity availability. Electricity generation in the first two months of FY16 has only risen by a paltry 2.5% despite adequate coal supply. With discoms limiting supply to the loss-making segments and an additional 21GW of coal-fired capacity in FY15, capacity utilisation for coal-fired plants has declined from already low level of 64.5% in FY15 to 62.5% in the first two months of FY16.
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Over the last two years, UBS points out, the electricity consumption in the loss-making segments, agriculture and residential, has grown 8.4% and 9.7% annually, respectively, whereas the profitable industrial and commercial segments have grown only 4.3% annually. As per UBS’ estimates, an adverse mix change has resulted in power distribution companies’ aggregate FY15 losses increasing by 27% over FY13, the last year for which data is available.
Restructuring of SEBs will serve little purpose unless the state governments are willing to increase tariffs for agriculture and domestic use. But this is easier said than done. Political parties continue to exploit vote banks by announcing cheap power for domestic use. Till such freebies continue, SEB restructuring will be of no use. And unless SEBs are empowered, little progress can be made on power sector reforms.