Move from short-term loans to bonds great for SEBs: Experts

The new power tariff for FY13 is expected within a month. Already reeling under financial strain, the new tariff could not have come at a better time for power distribution companies (discoms). The 120-day period from when discoms submitted their average revenue requirement (ARR) petitions to Delhi Electricity Regulatory Commission (DERC) is due to lapse soon.

The Shunglu Committee had recommended the recovery of variation in power purchase cost on a regular basis to prevent discoms' finances from taking a hit. This in turn would protect consumers from being burdened by future interest. Discoms have stressed the need for immediate implementation of the power purchase adjustment formula rather than the fuel cost adjustment which alone is not enough to cover the deficit faced by them. On the issue of bad debt facing power companies, SK Tuteja of the Shunglu Committee tells CNBC-TV18 that one of the recommendations is that half of the 50% of the total loans that banks have be restructured into long-term bonds. “The long-term bonds will be issued by discoms guaranteed by the state government and will be for a period of 10-years. The rate of interest could be between 9-10%.” Tuteja says the short-term loans will then get converted into long-term bonds which will bring the rate of interest down, giving them a cleaner balance sheet and will see their interest liabilities go down as well. As a banker to many of these entities, RK Bakshi, executive director, Bank of Baroda is also of the view that regular tariff revisions are a must if power companies are to get sustainable relief ahead. “From the SEBs and banks’ point of view, so long as it gives a longer tenure and a certainty of a rate of interest on those bonds to the SEBs, that’s a good option, because most of the fund requirements are not short-term for SEBs,” he says. But Bakshi cautions that restructuring without working out a business model is not a good solution as it will not work in the long run. “Unless the end deals are also cut and tariff revisions and other disciplines are taken care of, I don’t think it will be enough,” he adds. Below is the edited transcript of the interview. Also watch the accompanying videos. Q: In terms of the recommendations that have been made on this entire bad debt issue and how it could be resolved for the power companies? Is the government now keen on some kind of bond issuance? How will it be structured between the lenders and the Discoms themselves? What is your own understanding of the suggestions that are being put forth? Tuteja: My understanding of the suggestion is this that a Committee of Secretaries of which the Secretary to Prime Minister is the chairman, they have gone into the whole question of restructuring of loans for the Discoms. We had earlier in the Shunglu Committee made certain recommendations on it. Those recommendations were in turn then looked after by Mr. Chaturvedi of the Planning Commission. Though that exercise was going on separately, this exercise has been taken up by the Power Ministry itself. The suggestion obviously is this that there are three parties involved, the state government, the Discoms and the banks. From what I have been able to understand from this committee’s recommendations is that, half of the 50% of the total loans that banks have they will be restructured into long-term bonds. The long-term bonds will be issued by the Discoms guaranteed by the state government. In a way, they will be for a period of 10 years and the rate of interest could be between 9-10%. Presently, many of these loans with the Discoms are at a higher rate of interest. So, short-term loans will get converted into long-term loans and the rate of interest will also go down. This is how it has been proposed to help the Discoms, so that they come out with a cleaner balance sheet and their interest liabilities goes down. Q: Would this be a fair way to move about it and what implications would it have on a public sector bank like you if indeed the kind of restructuring of the loans and the move from short-term to long-term bonds at a lower interest rate that Mr. Tuteja is talking about comes through? Bakshi: I don’t know whether it will be worked as a restructuring proposal or the bond issuance will be separate fund raising. If it is a direct restructuring then some of the RBI norms for additional provisioning for the sacrifices made by the banks may make it look attractive. I do not have much information on the whole thing, so I am making my statements on the basis of whatever is apparently on the face of it. If there is a direct restructuring, suppose we have a Rs 500 crore exposure somewhere in 250s to be restructured from a rate of say 11.5% to 9-10%, then it will involve RBI norms of restructuring and there maybe additional provisioning required. From the SEB’s and bank’s point of view so long it gives a longer tenure and a certainty of a rate of interest on those bonds to the SEBs - that’s a good option. For SEBs most of the fund requirements are not short-term. They have to create lot of transmission, distribution infrastructure. Lot of term loans are taken in short-term just to save on rate of interest. There are so many other parameters of various recommendations whether it is Shunglu Committee or other committees which necessarily need to be worked upon. Only restructuring without working out a business model is not a good solution, it will not work in the long run. Unless T&D losses are cut, tariff revisions and other disciplines are taken care of, I don’t think this will work. But this is anyway is a good option to give longer tenure; it’s a recognition of the fact that longer tenure is required for the loans. Q: We have had bailouts in the past and we may have another one coming through soon, but from what you have heard over the last few weeks is it giving you the sense that this is just kicking the can down the road once again or some of these recent tariff revisions which have happened makes you believe that this time we are working for a more durable fix rather than these periodic bailouts that the government has been resorting to? Tuteja: Let me put it across to you this way that the reforms in the distribution sectors involve three basic things. One is the reform in terms of periodic revision, because many states have not been doing it for years together. Second, you have to ensure that there is a periodic revision. Be that the T&D losses come down for which the technology intervention is the most effective answer. _PAGEBREAK_ You have customers not paying for years. You have customers who are drawing electricity without proper metering and so on. For those things human intervention has to be substituted by technology intervention. The third thing is that there are certain reforms required even in the regulatory framework that these states have. When we talk of restructuring of loans this is one of the exercises that has to be undertaken to make these units viable. Unless these units are viable in the long run I think you are right, what happened in 2003-2004 can get repeated. That’s not the way. I see lot of hope this time because you would have seen in last about three months or so some 9-10 states have already given revision of their rates. The State Regulatory Commissions have been made more accountable. There was a recent order of the appellate body in the regulatory regime asking them to do it by March 31 every time a revision is to take place. More importantly, I feel that because of lack of funds with these discoms what has happened is that there are outages, there are power cuts and that is putting a lot of pressure on them. If this pressure works then they will become far more accountable and far more viable. I therefore see a lot of hope in what is happening this time. Q: What’s interesting about this liability restructuring though is that the center’s suggestion is that the entire burden is split between the state governments on the one hand and on the utilities on the other hand whereas I think what the Chaturvedi Committee Report was talking about was an equal split between the banks and the utilities. Politically, do you think this is a suggestion that will go through smoothly? Tuteja: I don’t think you will see it this time because of one very reason; the ownership of all discoms is of the state government. The central government does not own anything in these companies. Therefore the state governments also know it that it is their baby. Secondly, in many of these loans there is state government guarantee existing. So, morally at least the state governments know that it is their responsibility. During the course of the deliberations of our committee we had some interactions with the state governments. Almost all of them did agree to this point of view that if there is a restructuring they would be happy to extend their help to the discoms. The only point that whether the banks should take a cut or a haircut is a point on which there can be difference of opinion. Most banks will not agree, obviously they need not, but I think the banks are willing for restructuring and going to a lower rate of interest. Q: Immediately what kind of impact will it have in terms of what is happening on the NPA side for bank such as yours because this time as well you had to account for the SEBs nearly 2,100 crore on your books, what kind of immediate restructuring do you think will happen if indeed these changes come through? Bakshi: I don’t think any of the SEBs has defaulted. There is no NPA in SEB sector in our books. There has been a restructuring. Even this one which is being talked about through bond route is also a step for restructuring of the deal. So whether bond or not, if the borrower does not have the cash flows to meet the immediate obligations and the loans have to be given more time then some sort of a restructuring is required. Whether it is in the ambit of loans or it is in the ambit of bonds. The only thing will be that long tenure will be attached to those bonds. They will also have to be saleable because tomorrow there might be other investors who might be ready to buy them at that yield. So, with bond the whole dynamics of liquidity becomes different. As far as the banks are concerned, whether they do it through the loans or through the bonds, it may mean the same thing. As it is stocks maybe on vis-à-vis what SEB exposures various banks hold for their restructuring. Q: Will you also tell us what do you expect from the RBI on June 18, are you going with the CRR plus a repo rate cut expectation? Bakshi: At the moment, we are going by a repo rate cut expectation.