Discom debt recast: No immediate impact on banks

Moneycontrol Bureau

The government bail out package for cash-strapped state power distribution companies (Discoms) is unlikely to have any immediate impact on banks, which had loaned them. However, lenders are expected to get long term benefits provided the scheme is implemented right in time, analysts tracking banks said.

"The plan is flawless but political will is needed to implement it," said Nilanjan Karfa, banking analyst at Brics Securities.

"Globally restructuring of power companies has been a successful story. Some 10-20 years back, we had seen it South America, Argentina and Peru. Without proper implementation, it will end up similar like situation even after five years in India. The onus is now on the state governments."

The banking sector's short term exposure to discoms is estimated at Rs. 1.5 - 1.7 lakh crore as on March 2012, which is 3-3.6% of banking credit and 45-52% of total power credit, said a research report by rating agency - ICRA.

Most of the state governments, according to analysts, are already bearing the burden of high debt. The government may also tweak the FRBM Act to make provision for repayment of loans. The act probably does not allow fiscal deficit to fall below a level.

"The package will become fruitful only if SEBs (state electricity boards) improve their financial performance, going forward, especially via tariff hikes and Transmission & Distribution loss reduction. In the short-term, the overhang on asset quality of banks due to SEB's large quantum may abate," Kajal Gandhi, Vasant Lohiya and Jaymin Trivedi, banking analysts from ICICI Securities, said in a research report.

A synopsis of different research reports suggests that banks like Allahabad Bank, Andhra Bank, Canara Bank, Central Bank of India, Dena Bank, Indian Bank, Oriental Bank of Commerce, Union Bank of India, Vijaya Bank would have higher exposure to discoms. All of them are likely to be benefited due to this government package in longer term.

As per Cabinet Committee on Economic Affairs (CCEA), accumulated losses of discoms are estimated at around Rs 2.46 lakh crore in FY11 as against Rs 1.9 lakh crore in FY12. The scheme proposes that 50% of short-term liabilities (bank loans) will convert into bonds, which will be taken over by states after two to five years. The balance 50% short-term liabilities will be restructured by banks with three year moratorium of principal loan amount.

"Thus, in the short-term (up to two years) the scheme may not be too positive for banks as bond exposure poses net present value (NPV) hit if coupon is lower & MTM risks also, thereby impacting bank earnings. The silver lining for banks post the proposed restructuring plan includes the reduction in risk weight applied on bonds as they are guaranteed by state governments. This would enhance the capital adequacy ratio of banks to a certain extent," said the report by ICICI securities.

Meanwhile, the ministry of power did not allow the SLR status to those bonds to be issued by state power companies. This initially raised some concern about the security of those bonds. However, a section of analysts ruled out any such apprehension.  SLR or the statutory liquidity ratio, is the portion of deposits that banks are mandated to keep in government securities. Currently it is at 23%.

"Respective state government will guarantee all those bonds. This is only another form of sovereign security. However, we will wait for more details on those bond issuances before concluding anything," said a banking analyst from a brokerage, associated with a large bank.

Also read: Discoms debt restructuring package to be performance linked

"Banks' exposure to discoms, large part of which were taken to fund the cash losses, would reduce to half, thereby reducing overall vulnerable amount. Further, with improvement in underlying liquidity, immediate threat on slippage to NPA category could reduce. However, if tariff revisions or other operational improvement measures are not sustained, we may have only postponed the underlying problem, giving the lenders false sense of low NPAs from SEBs for few more years," the ICRA report said.

saikat.das@network18online.com