It was reported that under the new Financial Restructuring Plan (FRP) for power distribution companies (discoms), the state governments will entirely take over the debt of power discoms of eight states. These states are Rajasthan, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand, Bihar and Telangana. But speaking to CNBC-TV18, BP Sharma, MD and CEO of Bank Of India suggested only 50 percent debt of the Discoms will be transferred to state government which reduces the risk weightage to that extent. The remaining will half be restructured. Bank of India has 1 percent exposure to state electricity boards (SEBs) and all of them are standard assets, he said.Speaking on the subject, Ajay Jain, Energy Secretary, Andhra Pradesh said the experiment has helped two discoms in his state which are out of red. Andhra Pradesh government had taken over Rs 4,400 crore debt of discoms with the focus to reduce both technical and commercial losses.Former Chairperson Of CERC Pramod Deo says the real problem is in subsidizing sectors like agriculture. Giving example of Maharashtra, he said 16,000 consumers in the state contribute a whopping 41 percent to discoms' revenue. Below is the verbatim transcript of the discussion.
Latha: Are you privy to any discussions between the Central Government and the State Government? Can you enlighten us as to what the gameplan is? Is the entire discom debt going to the state governments? What have you been told?
Sharma: I will not call it a gameplan. A lot of money is stuck, public sector banks even private sector banks. Some rehabilitation package has to come. In past they tried with restructuring, it could not succeed. So, the idea of transferring 50 percent debt to state government per se is a good idea. It will help the banks and it will help the Discom companies. But the broader is issue is not somebody picking up the liability. The broader issue is improving the efficiency of the Discom.
Sonia: So, the plan is to transfer 50 percent of debt to the state governments, not the entire debt?
Sharma: Right, 50 percent. Rest 50 percent comes under restructuring and it will be more in technical restructuring.
Latha: I was just going to ask you, when you say restructuring then at the moment, there is no third category. If you restructure, it becomes a NPL, doesn’t it?
Sharma: Regardless of whether it becomes an NPL or not, 50 percent guaranteed by the state government itself is a welcome step. That reduces the risk weightage for that amount and time to come, the efficiency improves, the money will come back to banks.
Latha: But then you are saying that there is a very real danger of 50 percent possibly becoming NPLs in the case of some Discoms?
Sharma: Not as a general rule maybe a very few companies where the record of recovery is so poor.
Sonia: Can you just start off by telling us what exactly is the Andhra Pradesh Discom situation? What are the losses at this point and how much of the loss is gone down in the last year or so?
Jain: What has happened is in the combined Andhra Pradesh, we had taken up the financial restructuring plan. That time there were four distribution companies which are now actually two in Andhra Pradesh and two in Telangana. So, as part of the FRP in the combined state at that time Rs 17,000 crore was outstanding losses of which 50 percent was taken over by the state government and 50 percent was converted to a long-term debt. In that as far as Andhra Pradesh (AP) is concerned, we had about Rs 8,800 crore in which Rs 4,400 crore has been taken over by the state government whereas another 50 percent has been converted into a long-term debt.
Post 2014, after the bifurcation of states, now we have taken up a series of measures to improve the efficiency, both technical and financial, of the distribution companies. The main priority has been to reduce the aggregate technical and commercial (AT&C) losses. So, it was around 13.94 percent. We already had one of the lowest losses in that.
I am happy to inform you that in this financial year, as on August we had been able to bring it down to 10.37 percent which is one of the lowest in the country. So, a big focus is being given on the reduction of both technical as well as commercial losses.
Secondly, another parameter is regular filing of tariffs and see that a nominal increase of tariff takes place. A very hefty tariff also puts a burden on the consumer. At the same time, if we do not increase, then it affects the performance of the companies. Therefore, regular tariff filing which was not there earlier for almost 7-8 years, we did not file tariff filings. Even if it was done, it was the same tariff which was repeated. The last time we had gone for a increase of five to six percent. Again, this year we would be filing, so, will have nominal increase of tariff and most important is to bring down the power purchase cost.
In the whole thing, the main thing has been that without proper planning, we had gone for short-term purchases of power at exorbitant rates of Rs 13-14 per unit and then supplying to consumers at Rs 5-6 per unit. That is where the Rs 17,000 crore loss had come. So, now we had tied a power on a long-term basis at economical range of Rs 4-4.50; below Rs five, so that whenever we give it to the consumers.
Fourth step has been giving 24/7 power to all the consumers, particularly industries. In the past they were power sets, it was imposed on the industrial sector.
Latha: At the moment are both your discom companies in the green?
Jain: They have come out of red. I would not say green. Last year, last entire year our losses were about Rs 700-800 crore, which was within a manageable figure, and by the year end we want to ensure that the future losses will not be there.
Sonia: How much has the operational or the financial performance of discoms as a whole improved since the FY14, due to the implementation of the FRP? And going ahead, if this proposal to recast the loans is successful, how much of an improvement do you see for the sector?
Deo: From the newspaper reports, what I gather is that the note is going to the cabinet, where instead of now this 50 percent which was the old United Progressive Alliance (UPA) package, the new package is that 100 percent of the loan has to be taken by the state government and they have to issue those state bonds and in case of the default, the subsidiary which goes from central government, it will be adjusted against that. That is the package.The eight states which are really creating problems are the states which have got the large losses. Andhra is also one of them, but I do not have detailed information about Andhra. But, the problem lies in that you are subsidising certain category of consumer, mainly it is the agriculture. And for that state already, there is sufficiently large burden from its budget.
What happens is that whatever the tariff is determined by the state regulator and if you want to reduce it further, then the state government has to give subsidy. Just to give an example, Maharashtra, where the tariff determined for agriculture is Rs 3, but Maharashtra government wants to give it at around Rs 1.30, that money is given. That nearly comes to Rs 4,000-4,500 crore. But even this Rs 3 is only 51 percent of the average cost of supply.So, that means that the industry is cross-subsidising because Maharashtra is such a glaring example though its financial performance is considered good._PAGEBREAK_Latha: There are a couple of inconsistencies which we need to understand. Even we read that 100 percent of the discom debt would go to the governments but BP Sharma has been speaking about 50 percent. Have you been told at all whether 50 percent of the discom debt will go or 100 percent of the discom debt will go to the governments?
Sharma: I am just quoting from the press only. Unless it comes in black and white, what I understand it is 50 percent.
Latha: There were a lot of press reports suggesting 100 percent. Yesterday, when we asked the secretaries at the press conference, the secretaries of the finance ministry, they just merely said it is work in progress and did not elaborate whether it is 50 or 100 percent. Would you know is it 100 percent of the debt going?
Jain: I am not aware. Of course, there was a meeting with Minister Piyush Goyal on September 12, so it was discussed some of the states like Uttar Pradesh (UP), Rajasthan, Tamil Nadu, these were the states which were primarily considered and it was pointed out that Andhra no longer requires further assistance.
Latha: What was your sense? You spoke about eight states, now clearly Andhra is out of it. Uttar Pradesh, Rajasthan, Tamil Nadu were the three troubled states. Which are the others?
Deo: Haryana is one, Jharkhand is another, Telangana is there. I have got the newspaper report, from that what I am saying. But the focus has to be on these eight states and according to that report, even Andhra is included. Those are the matters of detail.
Why I gave the example of Maharashtra, also I started studying Gujarat because these are the states which are performing very well. These are the kind of models where they had done feeder separation so that you know how much electricity is being consumed in agriculture sector.
Otherwise in all the states, where the proper metering is not there, you cannot meter agriculture. The result is you do not know how much electricity goes to agriculture consumers. So, in that case, when we talk about the AT&C losses, that still remains a guess estimate and then we make tall claims that we have reduced them by so much percentage, but have you reduced because otherwise those inefficiencies continue. So, this is the problem that we have and the problem is a political one. How much subsidy a state government can afford to give to agriculture.
Now, Maharashtra’s case is that they are giving total subsidy of Rs 8,500 crore. So, out of that half is given by the state government, half comes from the tariff.
Sonia: What exactly is the exposure that Bank of India has to State Electricity Boards (SEB)?
Sharma: We have about one percent but no non-performing assets (NPA), all the accounts are standard accounts.
Latha: Are you privy to any conversation about whether 50 percent or 100 percent will be transferred to discoms at all even though you are not that case?
Jain: I was there in the meeting but it was decided that something would be done, but what exactly, whether it is 50 or 100, we are not aware.
Latha: If the 100 percent is shifted, will a 25 basis point increase in the Fiscal Responsibility and Budget Management (FRBM) limit suffice of will a large leeway have to be given on FRBM limit?
Jain: That will depend on the financial position and borrowing capacity but yes it was decided that FRBM limit will be increased to some extent. That is what was discussed that day in the meeting held on September 12 with the Honourable Minister with all the Chief Secretaries of eight districts were there. But then in that it was pointed out that the states which really matters are three to four states.
Sonia: You said that you have a one percent exposure to the SEBs. Can you give us some numbers? To the power sector as a whole what is your exposure?
Sharma: Power sector, it will be around Rs 15,000 crore.
Latha: And SEB would be?
Sharma: SEB will be around Rs 4,000 crore.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
