Nine states with maximum debt may opt for SEB pkg: CRISIL

Pawan Agrawal - Director , CRISIL Ratings .

The financial restructuring package for state electricity distribution (SEB) companies was approved by the government yesterday. Pawan Agrawal, Director of CRISIL Ratings believes states that have the maximum debt levels are the ones who are likely to be the first ones to opt for the package. At the moment, there are nine states who are likely to choose the debt restructuring package. 

Also read: CRISIL views on Cabinet approval for SEB restructuring

How will SEB bailout package impact banks, power shares?

Crisil has clustered the states into three categories depending on its ability to support the SEBs. Fiscal management, self reliance and debt servicing capability are the parameters that have been considered for forming these clusters.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Which are the state governments that have the fiscal flexibility to go ahead and execute this particular proposal that the government has thrown up and which state governments would go ahead and proactively take the burden now of this 50 percent debt?

A: Before getting to state governments specifically, let us look at SEBs where we see the maximum need for this restructuring happen. We had put out a study on power sector and implications of that on various SEBs and the states. We classified the SEBs based on their operational performance as well as debt levels. The states where we see the maximum debt levels are the ones who we believe will be the first ones to opt for this because it would be something that is priority.

These are essentially nine states, which we believe will have the maximum debt levels. Out of these 9 states, you will essentially look at states which have the capacity to be able to take on the debt restructuring and transfer it from SEBs to the states. 

Therefore, if you look at these 9 states, we have clustered the state governments’ ability to support their SEBs based on three broad parameters. We have clustered them into four groups. Out of these 9 states, three of them will fall in cluster 2 and five will fall in cluster 3. Clearly, the ones which are in cluster 3 will require a bit of flexibility in terms of their ability to take on the debt over a period of time.

Q: Could you tell us what is cluster 1 in the first place and then cluster 2 and cluster 3 also. Which are the states that fall in this category?

A: Cluster 1 will be the states which will have maximum capability to support their SEB debt. The three parameters that have gone into this clustering are essentially fiscal management, self reliance and their debt servicing capability. Based on these three, cluster 1 are the ones where you will have maximum ability to support. None of the 9 SEBs which have the maximum debt fall under cluster 1.

The ones which are in cluster 2 essentially are the ones which are relevant from the nine. They are Andhra Pradesh, Haryana and Tamil Nadu. The ones which fall in cluster 3 are the remaining states of Punjab, Rajasthan, Uttar Pradesh, and Madhya Pradesh.

Q: Would it be therefore safe to assume that banks which have exposure to Haryana, Tamil Nadu and Andhra Pradesh SEBs are perhaps in a better position and will be likely to go forward first? Or would it be the other way round simply because your back is to the wall, Uttar Pradesh and Punjab will come forward first?

A: If you look from a bank's perspective, one also needs to keep in mind the fact that a lot of restructuring has already happened so far. Our estimate is that nearly Rs 60,000 crore of debt has already been restructured and this restructuring has happened primarily for Rajasthan and Uttar Pradesh. Although, some smaller restructuring has happened for some of the other states also.

For these two states the question will be whether there is additional short-term debts that will still need to be restructured or the debt that has already been restructured is the one that will be offered under this debt restructuring scheme.

For other states, most likely the short-term part of their total debt is the one that would be considered for debt restructuring.

Q: have you done any kind of analysis on what the losses will be that the banks will have to undertake on restructuring since covering 50% of debt into bonds might now necessarily give them SLR status for these bonds?

A: At this stage the terms of the restructuring are unclear. It will depend on the way the restructuring is done. But, what we believe clearly is that 50% of the debt that would be converted into state government bonds typically will be at lower interest rates given the fact that there is a differential that exists in the borrowing of state government bonds and the debt at which SEBs borrow.

Over a period of time, if we look at overall numbers we believe that unless there is a regulatory forbearance which is given, this potentially can be upwards of Rs 4000 crore.


Q: Rs 4000 crore will be the net present value (NPV) loss?

A: It is possible, it will depend upon the nature of restructuring.

Q: Is it only NPV loss or are you also including provisioning that will have to be done on the remaining 50 percent because they have gotten restructured? So is Rs 4000 crore the total trimming of profit you will see in the banking sector?

A: The Rs 4000 crore is our estimate based on some assumptions of the NPV loss. The provisioning for restructuring will be in addition to that.

Q: As a person who rates a lot of bank paper, which are the banks where you feel the exposure is giving you some sense of comfort, you ranked the states, can you rank the banks?

A: The ratings of the banks are already out in public domain. For banks, typically if you look at the exposure to SEBs it will at best be 2-3 percent of their total exposure. Therefore, in a very limited manner if we look at this particular element, it may not be the only reason why you will look at the rating of a bank.

The ratings of the banks today are centrally supported by our belief that capital support from Government of India (GoI) is available. We have also seen that GoI has put in more than Rs 50,000 crore, included committed amount this year into the banks and that also is an aspect that needs to be considered and looked at when we look at overall credit profile of banks.