Shares of some state-owned banks and power finance companies rose sharply on Tuesday on hopes the government would soon take a decision on restructuring the debts of State Electricity Boards (SEBs).
A Cabinet committee is likely to take a call on financial restructuring of SEBs in three weeks.
The reports indicate states will take the burden of 50 per cent of the debt and issue bonds against these, while the other 50 per cent of debt will have to be restructured by banks.
| PERFORMANCE SHEET | ||
| Sept 18, ’12 Sept 18, ’12 | %chg* | |
| Oriental Bank of Commerce | 287.35 | 12.97 |
| Canara Bank | 393.5 | 9.18 |
| PFC | 195.4 | 7.96 |
| Central Bank of India | 71.75 | 6.85 |
| REC | 219.45 | 5.28 |
| * Change over previous close Data compiled by BS Research Bureau | ||
State-owned banks with relatively higher exposure to SEBs like Oriental Bank of Commerce, Canara Bank and Central Bank gained between six per cent and 13 per cent on the bourses.
Power financiers such as Power Finance Corp and Rural Electrification Corp gained five per cent each.
While a section of analysts say the collective debt of SEBs and power distribution companies stands at Rs 5,00,000 crore, analysts at Standard and Poor’s (S&P) say the power sector’s current debt is seven per cent of the banking sector’s loan dues. This, in absolute terms, adds up to Rs 3,30,000 crore. Distribution companies account for 25 per cent of this debt.
The government’s plan proposes to restructure only a part of the loans to distribution companies. Half the loans to these companies would be transferred to the respective state government, for which the distributing companies would issue bonds. The companies would have to service only the interest on the revamped loans, while state governments would service interest on the bonds.
More From This Section
Banks and financial institutions might reschedule the rest of the loans, with a moratorium of up to three years on repayment of the principal amount, according to an S&P report.
Under the scheme, distribution companies could be asked to reduce transmission and distribution losses and raise rates, if required. S&P believes at six cents a unit, India has the lowest power rate in Asia and, therefore, there’s room for more rises.
However, not many analysts believe this plan would work, as this would only offer the stressed power entities a temporary reprieve. Despite debt restructuring, some SEBs continue to borrow money.
Analysts say as long as these entities borrow, their cash flow would remain under pressure. For the financial health of the power sector to improve, the tariff regime has to become more transparent and the practice of giving subsidies and distributing free power has to end.