Restructuring of discoms mostly complete: BoI

In a move to save state electricity boards from slipping into deeper losses, the Cabinet Committee on Economic Affairs (CCEA) on Monday cleared Rs 2 lakh core debt restructuring proposal for state electricity boards.

As per the plan, states would restructure 50 percent of SEB loans, and the remaining will be restructured by the lenders. States will have to settle all power outstanding by November, 2012. Meanwhile, states and power distribution companies are barred from fresh short-term loans.

Speaking to CNBC-TV18, N Seshadri, executive director, Bank of India said, power producers will now get timely payments, which is very positive for the banking sector a whole.

However, he added that the bank has mostly completed restructuring of discoms. "As far as discoms are concerned, we have done what is to be restructured. I don’t see that having an impact in the P&L because the impact has already been absorbed and it is very insignificant."

Welcoming the SEB debt recast move, Pramod Deo, chairperson, CERC said, this plan would be successful only if implemented properly. "There are many conditions and unless those conditions are observed, the relief package is not going to be fully implemented and that’s the crux of it," he added.

Below is the edited transcript of their interview with CNBC-TV18.

Q: We know that half of the exposure to the State Electricity Boards (SEBs) is going to be absorbed by the state government. When you reschedule the remaining 50 percent of your loans would you not have to provide for those loans? In that case, if this happens this year itself your profits will reduce because provisioning will increase.

Seshadri: Let me put it in right perspective, the exposure to the sector and if it has got different layers, the most important exposure that banks have including Bank of India is to the power producers.

Infact discoms as a part of that whole exposure is not as much as the power produces’ exposure. Since discoms happen to be the last delivery in terms of the whole ecosystem of power sector, the concern is how the exposure on the producer will have its impact on the health of the discoms.

Q: What is your exposure to discoms?

Seshadri: I would not like to give you the exact details, but let me tell you the entire restructuring what has been done in the past and it is almost complete has not had any significant impact on the P&L. Historically, discoms have been enjoying interest rate at very competitive rates because of state government guarantees.

The restructuring what is envisaged even under the present plan and what we have already done, would not definitely impact their P&L significantly. What is more important is in fact the comfort level that we get in terms of the power producers getting paid in time and the growth happening in the sector, which is very positive to the banking sector as a whole.

Q: In terms of certain numbers what percentage of your loan books forms the loans to the power companies? Because of this proposal how much do you think your provisioning could reduce say in the next couple of quarters because of what has come through?

Seshadri: As far as discoms are concerned, we have done what is to be restructured. I don’t see that having an impact in the P&L because the impact has already been absorbed and it is very insignificant.

What is going to be positive for us is, we have exposure to power producers, which is several times more than discoms, there are uncertainties with respect to payments, the reforms would ensure that the power producer paid in time and growth is happening that would augment well for the bank.

Otherwise, our concern is not on the discoms per se, but on power producers in terms of cash flows.

Q: What is your sense of how much this entire proposal can go through and do you think it will be easy for the states to accept the terms to revise the tariffs given the kind of political compulsions that you are sitting with right now?

Deo: This is a welcome step because as the reform in the power sector was getting derailed, so after 2002 it is almost after a decade that a similar action has been taken. A lot depends upon the implementation because there are many conditionalities and unless those conditionalities are observed, the relief package is not going to be fully implemented and that’s the crux of it.

One very encouraging thing is that after the appellate tribunal order in the last one year, 28 distribution companies that is SEBs, have revised tariffs and a substantial revision has taken place. Given the huge losses that they have on their balance sheets, just by increasing tariff it was not possible to wipe out those losses. So, this package was unavoidable.

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Q: You have had intimate experience with the various state governments as well. You have been in Maharashtra as well handling this issue. So my point is how many of the states will be able to come forward? You must have done some fairly serious calculations, which of the states have the fiscal headroom to come and absorb this 50 percent of loans in the form of bonds you think?

Deo: Because of this fiscal management discipline, states have been trying to do that. But the tendency has been that instead of taking this burden on the state budget they wanted to do it through their SEBs. That will be now prevented by this step.

Another concern of bankers is, all these distribution companies are buying electricity from producer and those are not any more only government producers. The share of the private generators is nearly 27 percent. In fact in the next five years, with the new capacity it will almost reach 50 percent. Now, in that case this kind of a situation could not have continued.

It is up to the state governments to realize that if they do not pay for this electricity then the only option is to go for more load-shedding, which leads to political discontent and grid failure the kind of situation.

Q: The other big problem that is confronting many of the power generators is that they have signed Power Purchase Agreement (PPAs) which they now find unviable, you know the ongoing discussion and you have been party to it that the PPAs can be renegotiated. Realistically how many PPAs can you think be renegotiated? Are the electricity boards, and gen-cos on firm legal ground at all? How many can get renegotiated? How much reasonable time will it take because definitely there will be litigation?

Deo: We have received two cases both pertain to Mundra power; one was from Tata’s and the other Adani’s. These cases are still under hearing stage, so I cannot comment on that. The important issue is that if fuel was an imported coal and because of volatility in the international markets, they are facing these problems. This is something which has to be understood by both parties.

As a regulator I cannot give my views on that because the matter is sub-judice. But, with new model tariff regulation, the cost of fuel is to be adjusted periodically. It has to be done every quarter, which means any changes in the fuel costs are passed on.

I am not referring to competitive bidding where costs were frozen. I am talking about all the others. We have fairly large capacities based on cost plus return and because this fuel adjustment was not done regularly, at the end of year suddenly the burden becomes very large.

Q: If you had to analyze how much the annual losses of SEBs would decline in FY13, what kind of a ballpark assumption are we looking at right now?

Deo: We are talking about average cost of supply and with whatever revenue they get, they have to start by bridging that gap. The regulatory assets created by regulatory commissions will also have to be liquidated because this money has to be paid via consumer to the distribution companies.

In this process, most important thing is improvement of efficiency because unless the distribution losses are reduced, the consumer will be left very dissatisfied. He will find tariffs are going up, service is not improving.

I would say that the important part of the package is improving efficiency and reducing the losses. So, there is a condition that they will have to go for a public private partnership model wherever the need arises.

Q: Can you give me a yes or no answer; you have been around from 1998 when the regulators who were put in place, in these 14 years we have not seen any suo-moto move on the part of regulators to ask for tariff increases. The state governments have increased tariffs only when their back is to the wall and the banks simply refuse to finance them, in the next five years do you think both these entities are going to behave differently?

Deo: The message is very clear because this time also when I referred to the 28 state regulatory commissions going for tariff revision, we had two states which had done its suo-moto- Jharkhand and Gujarat.

Considering that Gujarat is going to poll this year that is a very bold step on the part of the regulator. This holds a lesson for other regulators and what they have to do in future.