What's ailing much-hyped electricity board debt recast plan

Arnav Pandya

One of the initial steps announced by the Government in its latest burst of reforms dealt with debt restructuring of the State Electricity Boards (SEBs). This was considered as a major reforms measure as the total debt of the SEBs as per latest available estimates are around Rs 2.4 lakh crore and the completion of the restructuring process would have boosted growth in a critical sector of the economy. The debt restructuring processes called for the takeover by the States of 50 per cent of the debt of the loss making electricity boards and conversion into bonds that are backed by state guarantees. The remaining loans would be restructured by the lenders with a 3 year moratorium on principal repayments. 

On paper this looked like a winning formula but the players seem to have found the going tough and a poor response from states has forced the government to extend the initial deadline of the scheme from 31 December 2012 to 31 March 2013. While several states have given in principal nod to the plan the real benefit will come when all the required conditions are met.  Here are some of the reasons that are likely to have proved to be the roadblock in the entire process.

Tough medicine to swallow

The most likely condition that is likely to have resulted in the slow progress in the whole process is that the bailout proposed tough measures that need to be met at the ground level. These are good in the economic sense as they impose discipline and will improve the financial position of the SEB in the long run but with several state as well as Lok Sabha elections looming around the corner it is difficult to see many states willing to bite the bullet. Some of the tough measures required were adjustment of fuel costs on a quarterly basis and timely tariff revision. This means that states have to raise the price for the end user, which means additional burden on the people who are already reeling under high inflation from all side. There is also a point about advance payments towards subsidies provided by states to the agriculture sector.

The Central Government has also not provided Statutory Liquidity Ratio (SLR) status to the bonds that will be issued by the SEB in the restructuring process. This makes the bonds less attractive for lenders and hence would require a lot of persuasion in finding takers for the instruments.

Time in actual implementation

The bailout scheme has multiple players involved and while the bailout looks extremely good for the distribution arm of the SEB this needs some work by the states especially since they have to take over half of the debt. The states own financial situation in many cases is not too good and with the massive pile up of debt by the SEBs it will require long term planning to adjust this with the States financial position.

The process that was put in place for the entire scheme to be operational called for the approval to be taken from the state cabinet as well as the electricity regulatory commission. This is not an easy matter and the completion of this requirement will take some time because this can be quite significant in terms of procedure to be followed. In addition some states have also appointed consultants to advise them in this particular area which means that this is taking time in getting the final proposals through the entire process.

Position of banks

One of the issues was that banks had to be careful due to the provision norms that they face. Restructured advanced need a provision of 2.75 per cent (which has now been raised further) while standard advances require a provision which far less at 0.4 per cent. Banks also need to provide for the reduction in the net present value of the loan once it is restructured. This can be avoided by the banks after getting the necessary regulatory approval. Completing this approval process requires some time and effort and this can slow things down. Now there has been a comprehensive review and banks will be subject to lower provisioning for this restructuring which is good news for the times ahead.

The writer is a certified financial planner