Debt rejig to help DISCOMs become profitable in 3 yrs: OBC

The past couple of days has seen the government of India moving towards restructuring bad assets of power sector, mainly the state electricity boards. In an interview to CNBC-TV18, chairman and managing director of the Oriental Bank of Commerce, SL Bansal, says that this process will ensure that distribution companies (DISCOMs) will not have further losses after 18 months.

“There will be two conditions attached to the restructuring. The losses which the DISCOMs are suffering are primarily because there is a huge gap between the cost and the revenue. DISCOMs will be taking sincere effort and every six months they will improve the electricity charges so that in a year’s time they will be in a position to match this difference between the revenue and the cost. The idea is that in the next two years time they will be in a position to bridge this gap,” he said.

This restructuring process includes state governments accepting 50% of the loans from banks, and issuing bonds in place of them if the Fiscal responsibility and Budget Management Act (FRBM) allows it. The alternative is that banks will fund up to 70% of the DISCOM losses in the first year, 35% in the next year and then stop funding losses henceforth.

“After three years these DISCOMs will become profitable and naturally the stress in the banking will be taken care of,” said Bansal.

Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra.

Q: Have you been apprised of anything with respect to the State Electricity Boards’ (SEBs) or DISCOM loans getting restructured? Is the government or Indian Banks' Association (IBA) or RBI in touch with you?

A: The Government of India is working out a mechanism where these loans to the DISCOMs will be restructured. The formula which they are working out is same that we have been hearing. About 50% of the loans which are on the banks’ book will be taken over by the state government and they will issue the bond directly if FRBM rules permit. Otherwise, these bonds will be issued by any of the PSUs and the bonds will be guaranteed by the state government. The other method is that 50% of the loans will remain on the banks’ books. The banks will fund 70% of the losses up to 31st March, 2012 this year, and the next year these losses will be funded to the extent of 35% and henceforth no losses will be fund.

The repayment structure will be like this. For the loans in the banks’ books there will be a moratorium for three years and in the next seven years they will repay it. Now there will be two conditions attached to it. The losses which the DISCOMs are suffering are primarily because there is a huge gap between the cost and the revenue. For example, in Haryana, where we are the leader, the difference is about Rs 1 per unit. The DISCOM will be taking sincere effort and every six months they will improve the electricity charges so that in a year’s time they will be in a position to match this difference between the revenue and the cost and then there will be no further cash losses and that’s the idea that in the next two years time they will be in a position to bridge this gap.

Number two, the major losses of DISCOMs are due to these T&D losses which is around 25% for most of them. They will also try to correct this in balance years. Going forward, banks will not give them short-term funding. Naturally there would be an escrow mechanism where the banks will be taking care of repayment of their interest on a monthly basis. After three years these DISCOMs will become profitable and naturally the stress in the banking will be taken care of.

Q: You said escrow arrangement is one of the conditions, but a lot of escrow arrangements are already there. When your revenues are less than your expenses, what is the point in having an escrow? The money just doesn’t stay there. They pay salaries and their expenses are otherwise much more than their revenues. Does escrow work under such conditions?

A: The present escrow mechanism is such where we don’t have any control on the tariff. Now once the state government gives an undertaking that every six months the tariff will be revised upwards and these cash losses which are due to the cost, and the revenue deficit will be taken care of within the next 12-18 months, then the cash flow will be sufficient to take care of the repayment of the interest component for next three years time. The repayment in any case will fall due only after three years.

So in a democratic set up, we have to rely on the state government undertakings which they will be giving to us. Of course the central government is a part and parcel of all this arrangement.

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Q: Just give us a sense in terms of when this restructuring will come into play and what can we expect in terms of the current exposure that you have and possible restructuring which you would undertake at this point in time with regards to your exposure?

A: The plain restructuring have already been done by most of the banks. For example, in our bank we have done it for Haryana, we have done it for Rajasthan and we have also done it for UP. Maybe in the next quarter we will be doing it for Punjab also.

But the new restructuring which I am talking, where the 50% of the loan which is already on my books will be taken over either by the state government or any of the PSUs in the form of by floating a bond in the market and the proceeds of the bond will come to me. Then naturally my loan book will come down by 50%. But of course I will be funding the future losses for the remaining two years - 70% for the first year in 2012-13 and 35% of the losses in 2013-14.

Q: What do you mean by funding the losses? You will give them more loans?

A: Naturally. There is a gap between the revenue and the cost. Whatever is the gap, they will present a total picture to the bankers in the presence of ministry and then we will arrive at a conclusion that these are the realistic figures taking into account the projected revenue by factoring in the revision on tariff. Then 70% of those losses which are being arrived at will be funded by the banks, 30% will be funded by the state government. Naturally all these future loans as well as the present loans which are in my books will be guaranteed by the state government.

Q: What if DISCOMs don’t bring down the difference between cost and revenue? Do you have the power to call off the arrangement if you don’t find that kind of progress?

A: For the Rs 1 loss that I was talking about with regards to Haryana, the state government has already initiated various steps and the power tariff has been revised upwards twice in the last one years time. If they don’t fulfill their commitment, then naturally I am not obliged to fulfill my commitment; I will stop funding the losses. Worst is behind us, we have come to a negotiating table and we are discussing. I think everybody - state government, central government, banks - is interested in finding out a solution.

One more important thing is with respect to wherever the agriculture power is provided free of cost by the state government. There is again a clear cut understanding between the bankers and the central government and the state government that this 100% subsidy will be provided for in the annual budget of the state government. So hence forth there will be no populist measure as far as power is concerned. If the government is announcing any free work, then it will be declared it in the budget and will be fully provided. So to that extent there will be complete transparency.

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Q: How comfortable are you with this restructuring process and would you like something to be different or any sort changes to what has been advocated at this point in time?

A: Till now we were in the dark in the sense that we were funding and knowing fully well that we were funding losses. Now there is a clear-cut understanding that henceforth, at least for next 18 months onwards there will be no gaps in the revenue and the cost. So thereby there will be no further cash losses. Banks’ interests are protected in the sense whatever is my loan at present, I think if 50% is taken over by the state government or the PSU, then maybe further losses we maybe funding for two years. That cannot be more than what we have already funded or what will be taken over by the state government. So overall my loan portfolio will come down.

Wherever I will fund I will fund only the long-term capex or the working capital requirement, which is need based and will be purely on viability of my understanding or understanding of the balance sheet of that particular DISCOM. Full freedom will be left with the banks and if they want to compete then naturally they have to improve their financials.

Q: One of your predecessors, BD Narang, made a distinction between state government guaranteed loans given to SEBs and state government bonds. The impression I got was he would be far more comfortable with state government bonds rather than guarantees. Is that distinction something you will also insist on?

A: There is a difference. Mr Narang may be talking about seven years back when state governments were not paying any heed to the request of the bankers. Now things are different; now bankers are also forming up their opinion and they are also well supported by the central government. Everybody understands that in the long run you cannot continue to announce concessions on various fronts unless you have got finances solidly provided in the budget or by way of grant by the central government.

So ultimately, the state government or the bureaucrats whosoever is heading that particular department in the state government understands fully well that only financial discipline will take care of their future requirements. So if they don’t fall in line, naturally they will be harming their cause only.

Q: Your own exposure to state government power units is Rs 8,500 crore or thereabouts. Do you see this lower in the next year?

A: Our total exposure to the state government is about Rs 8,500 crore, and to DISCOMs is Rs 4,500 crore. So this Rs 4,500 crore, once it gets restructured, about Rs 2,200 crore will be taken over by the state government. The remaining of Rs 2,200 crore will remain on my books. I maybe funding few losses, but I believe it will never go beyond Rs 4,500 crore.

Q: Which sectors are you also facing further stress from in terms of asset quality?

A: A large number of accounts are rushing to the corporate debt restructuring (CDR) or they are coming to us even outside the purview of the CDR and we are restructuring based on the requirement. The economy is passing through a testing time and we have to support the entrepreneur. Normally textile sector is in problem, aviation all of us are aware, DISCOMs we have discussed, iron and steel is in a big problem. Let us see, I think going forward things will improve.