Having secured the debt recast package is just half a battle won. Banks want ailing state power distribution companies to regularly revise rates and drastically cut power theft to improve finances. “While periodic revision (read increase) will definitely yield results, it will always face political hurdles. So, cutting the extent of power lost in transmission and theft must also get urgent attention,” said three top executives of state-owned banks.
The package cleared by the central government compels state governments to annually revise power supply rates, mandates conversion of loans to equity and bring in private participation in distribution.
State-government-controlled power distribution companies had an accumulated debt of Rs 190,000 crore as on March 31, 2011. This was primarily due to non-revision of rates, raising the gap between these and cost of supply to 145 paise a unit (kilowatts per hour) in 2009-10 from 76 paise in 1998-99.
| SEB LOANS (as share of each bank’s loan book) | |
| Bank | (in %) |
K R Kamath, chairman and managing director of Punjab National Bank, said the debt side was getting tackled but reforms had to also happen on the technical side. Transmission losses have to come down. According to Standard and Poor’s, power losses in the system are as high as 30 per cent in some states. The global average is five to 10 per cent.
Shiva Kumar, managing director of State Bank of Bikaner and Jaipur, said the loan recast would definitely give discoms breathing room. But that is not enough; they have to also work to tone up.
According to BofA Merrill Lynch estimates, the highest exposures (four to seven per cent of respective loans) to state electricity boards (SEBs) are with Indian Bank, Union Bank, Bank of India, Oriental Bank of Commerce and Canara Bank. Interestingly, State Bank of India is the only government bank without an exposure to an SEB.
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BofA-ML, a broking house, said: “The impact on Net Present Value arising from an interest rate cut of two per cent, with a 10-year repayment and three-year principal moratorium for Union Bank, Indian Bank and Canara Bank is six to 12 per cent of FY13 PBT (profits before tax) earnings.”
The credit ratings of most SEBs have been lowered by domestic rating agencies, with the most troubled ones having a sub-investment grade rating, attracting a high risk-weight of 150 per cent.
After the proposed restructuring plan, though the banks’ earnings will be hit in FY13; their capital might still improve, given that the risk-weight would reduce to 20 per cent on the exposure guaranteed by state governments. This should enhance Tier-I capital by 10-30 basis points.