Banks are believed to have restructured loans of Rs 14,700 crore given to Haryana state power distribution company (discom). In a consortium of 11 bankers Oriental Bank of Commerce (OBC) is the lead banker with Rs 2,000 crore exposure. As a part of the restructuring package, the state government will issue bonds to banks, equivalent to half of the loan amount.
According to S L Bansal, chairman & managing director of OBC, lenders had initial discussion with the discom authorities to arrive at a consensus. Later, all banks of the consortium met. However, things will not happen overnight but are likely to be implemented by July 31.
"All the consortium banks and discom authorities are in the board. Respective banks will go to their board or whatever will be the requirement, they will fall in line, in the sense, they will say yes we are ready to implement this package. Then, we will give confirmation to the discom authorities and the state government will take few necessary steps whatever is required," he told CNBC TV18 in an interview.
Around eight states including Rajasthan, Uttar Pradesh, Tamil Nadu, Kerala, Himachal Pradesh, Bihar, Karnataka and Haryana have showed interest for loan restructuring schemes of their respective power distribution companies. Total loans would be around Rs 1.90 lakh crore.
When a borrower is unable to repay its loans and asks for relaxation of the original terms and conditions of loan agreements, it is called restructuring or recast. This may include reduction of interest rates, a moratorium of principal repayment and so on.
Below is the edited transcript of Bansal's interview to CNBC-TV18.Q: We are given to understand that about Rs 14700 crore of loans have gotten restructured in this bailout package and the state government will bring in Rs 7381 crore by way of bonds. Can you tell us the next few steps when does this happen, has the legislature to do something, do the banks have to go to their boards or does this process happen tomorrow?A: It doesn’t happen tomorrow, it has got few steps now. What will happen is we will have initial discussions with the discom authorities and then we will arrive at a consensus, followed by a consortium meeting of all the banks. All the consortium banks and discom authorities are in the board. The respective banks will go to their board or whatever will be the requirement, they will fall in line in the sense that they will say that they are ready to implement this package. Then, we will give confirmation to the discom authorities and followed by the state government taking a few necessary steps whatever is required.
Q: So that will take what three weeks, four weeks?A: By June 30 every sanction will be in place and then in the first week of July the approvals from the state government. The government needs to take over 50 percent of the loans by issuance of bonds. Once bonds are issued, then the restructured package will be in place.
Q: So the bonds come to you in July?A: I believe so because financial restructuring package (FRP) is to be implemented before July 31.
Q: We understand there are 11 banks, you are the consortium leader. Can you give us the names of main lenders, what is your exposure and who are the other big banks with exposures?A: There are other lenders also, almost all the banks are there. Our share is about Rs 2000 crore in this. Canara Bank, Punjab National Bank too are into this. It is appreciative that during the last 10 years every bank has been funding discoms and technically we have been funding losses but we have arrived at a conclusion that we will not fund any more losses after two years. Discoms will improve their efficiency.
Q: Totally how much of support would the banks have to provide and in particular OBC what will be the impact in this year as well as next fiscal year for supporting the losses?A: There will not be any impact. The scheme works like this - as on data, about Rs 10300 crore is the outstanding which was as on March 31, 2012. Now in addition to that, Rs 4400 crore were the creditors repayable over a period of 60 days that banks are going to fund. So, in all, the total outstanding becomes Rs 14400 out of which 50 percent will be taken over by the discom by issuance of the bonds and naturally it will be passed on to the state government. About Rs 7300 crore odd will remain and going forward we will fund the losses.
We have already funded Rs 3000 crore for 2012-13 which is already over. There is no more funding requirement for 2012-13 except this Rs 4400 crore whatever is the trade payables which we need to fund. Then, for 2013-14 Rs 3400 crore and 2014-15 again Rs 3200 crore is the amount that we need to fund. So, in all about Rs 11000 crore will be funded. Then the repayment will start in a fashion.
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About 50 percent of these bonds will be converted into special security over a period of two to five years. Once these bonds are converted into special security then the banks will be relatively secure in the sense that the payments will be assured. Even now, it will be guaranteed by the state government so it is not an issue. And the state governments and discoms will ensure that the operative efficiencies of the discom will improve on both the sides. They will cut the distribution losses, they will improve the efficiency whatever is stipulated in the FRP. There will be over side body appointed by the power ministry which will see that all these milestones are achieved, bank will also appoint an independent agency and then we will see.
Q: This Rs 7381 crore which comes in the form of state government bonds, what kind of an interest will it bear, will it be different from the interest you are getting from it currently so is there any net present value (NPV) loss? Separately the balance Rs 7381 which continues to remain on the books of the discom, what is the interest on it? On either count are you suffering net present value loss and which is the special security, the state government bonds are special securities or the balance Rs 7381 crore with the discom?A: It works like this- Rs 7381 crore which remains on the books of the banks or which is a loan, it will attract base rate plus 2 percent rate of interest which is the current rate of interest. So, there is no question of any loss in that.
Now 50 percent of this loan which will be converted into bonds, it will initially carry interest rate which has been again defined by Reserve Bank of India (RBI). Now these bonds will be initially issued for a period of two to five years. The state government will see how quickly these bonds will be converted into special securities. The overall period of these bonds plus security will be 15 years. Suppose they issue the bond for five years then security will be converted after five years.
If they issue bonds for two years then the security will be converted for 13 years. So the overall repayment period will be 15 years. Now, the interest works out like this, 10 years central government security rate as on date is 7.50 percent. On that you will add the premium of state government say 60 bps. Now 7.50 percent becomes 8.10 percent. Add to it 25 bps which is given as an incentive of non SLR status because the bonds will be non SLR. So 8.10 becomes 8.35 percent. Add to it there will be cost of capital because banks will be required to subscribe to these bonds which will carry 20 percent risk the cost of capital will be worked out. It will be around 8.35 percent.
Once these bonds are converted into special securities say after two years to five years but our state government is comfortable with whatever the consensus arrive at. Then these bonds will be converted into special securities, cost of capital will go then and these three things will continue still.
Q: Is OBC a part of a consortium of any other lenders for which the State Electricity Board (SEB) loan is yet to be restructured and is likely and if yes could you quantify how much of an exposure you all have to these?A: We are part of Haryana, Rajasthan and Uttar Pradesh. UP and Haryana restructuring is over, Rajasthan restructuring will take place and Punjab government has decided they will not opt for restructuring, they will continue to fund their losses and they will take care of their financials without opting for the FRP.
Q: When will Rajasthan happen?A: I believe in the next 10 days Rajasthan will also happen because ultimately all restructuring is to be put in place before July 31.
Q: What are you expecting in the credit policy and with or without a rate cut what will be the actions from the banking sector? You think there is elbow room to push rates down?A: Banks are sincerely trying to cut the base rate but unfortunately, deposit rate is not coming down. Three days back, we decided to cut our deposit rate of one year tenure by 25 bps which predominantly 65 percent of the deposit comes in that bucket. We are trying to reduce the cost. Fortunately, the cost of deposit for bulk deposits have come down substantially. We will see whatever benefit is accruing to the bank and we will try to pass it on to the consumer whether rate cut is there or not because repo rate cut doesn’t affect the cost of deposit much.
Q: Yes, but the finance minister just said that he is going to call the bank chiefs in a meeting to check out why they are not able to pass on the RBI rate cuts given so far is same measure. What is likely to be the defense?A: I also heard the FM. The RBI has cut the repo rate by 125 bps and the banks have cut their base rate by 50 bps from 10.75, they have come down to 10.25 percent. First of all, lets understand that entire repo rate cut doesn’t reduce the cost of deposits straightaway.
Only the cash reserve ratio (CRR) cut helps in reduction of the cost of deposit because the non-interest bearing assets have been released and then we start getting interest on that. The credit cost is also going up and it is a huge cost for the restructuring too. Now, one needs to provide provision of 5 percent on restructuring. All these things have to be factored in. So, if we reduce the rate without applying mind, then ultimately, the profitability can get hit. The FM will call us in the last week of June and we will discuss on the subject and then we will take a call.
