Punjab power discom fiasco: OBC, Canara not perturbed

PSU banks have started to become nervous on news that the debt restructuring package to rescue ailing state electricity boards have run into rough weather. On Tuesday, Punjab announced that it may not participate as the terms of the revival package were unviable.

The Oriental Bank of Commerce and Canara Bank have considerable exposure to SEBs in Punjab. SL Bansal, CMD, Oriental Bank of Commerce and RK Dubey, chairman, Canara Bank, in a discussion on CNBC-TV18, say they expect no default or delay in payments from the Punjab Electricity Board and have decided not to fund discoms that are financially unviable. Below is an edited transcript of the discussion on CNBC-TV18 Q: How much is Canara Bank exposed to discoms in Punjab? Dubey: I do not think there is going to be any problem with the discoms in Punjab. Our exposure is not very considerable and we plan to discuss and resolve the issue with the discoms. Q: Have the payments from the Punjab Electricity Board been on time? Dubey: Yes, they have been on schedule. Q: Do you expect any delay or non-payment? Bansal: It is on time. The electricity board has been paying the interest on time. The bank is exposed to the working capital limit of Rs 1,200 crore which is being repaid according to schedule. I do not foresee any problem. According to an Ernst & Young (E&Y) study the Punjab Electricity Board will make a profit and has approached the central government for some relaxation in restructuring package which the power ministry refused. The restructuring package offers uniform terms and conditions to all discoms and naturally, the Punjab government will manage with whatever resources are at its disposal. Q: What is the bone of contention? Punjab is not the only state to step away from the discom restructuring package. Madhya Pradesh has followed suit too. To what extent will this adversely hamper the discom restructuring process and the banks or lending institutions involved? Dubey: We are looking at it on a case-by-case basis. Bansal: The need for restructuring should be understood. The process of restructuring is called for because the discoms are not in a position to manage their losses and the banks have refused to fund those losses, so naturally these losses will have to be funded by the state government.
If state-governments are confident of managing the state of the discoms’ finances from their own budgets they would not prefer to comply with the stricter central government terms and conditions. But the central government’s restructuring package is important, because it ensures a gradual increase in tariff that will boost revenues, bring costs down and in three years’ time create a zero cash-loss environment.
The central government also mandates that the provision of electricity to any sector for free has to be provided for upfront in the Budget. If state-governments are not comfortable with this initiative, they will have to fund all these subsidies from their own resources. Banks are not going fund discoms any further unless their viability is established. Going forward, we will not fund discoms unless they are economically viable. Q: What is the status of the asset quality? Do you expect more restructuring to happen? Bansal: Restructuring has touched a peak and only a few assets are in the pipeline. It is expected to continue in March and June quarters after which the trend will start to taper. Overall, the restructuring book will turn stable for two reasons.
One, on RBI permission banks to take out assets that have been performing well for two years. Two, even if the Punjab has opted out of the restructuring pack, contribution from Haryana, Rajasthan and UP will clear close to 50 percent of the discoms' outstanding from banks’ books. To that extent, the level of restructuring in the books will reduce.
Going forward, the restructuring book will remain stable and if the economy starts to recover, then I feel that the asset quality will improve.