Bailout will boost banks' confidence to lend again: Fitch

Salil Garg, director - India ratings, Fitch explains to CNBC-TV18, in his reaction to the announcement of the debt-restructuring package for power discoms, that the package would boost the confidence of banks which ceased to lend to distribution companies who were financing their operating losses with short-term loans.

Also Read: Govt announces package to bail out power distributors Below is the edited transcript of Salil Garg's reaction on CNBC-TV18. Q: What do you make of the restructuring package announced by the CCEA? What does this mean for power companies?
A: We believe that this restructuring package is a huge positive for the power sector. Firstly, it will provided much-needed liquidity to the distribution companies. Secondly, it will benefit the rest of the participants down the chain like power generators and the traders whose accumulated dues will be paid and will enable them to ensure an assured supply of power. Also Read: Link bailout to mandatory initiatives: Shahi
Thirdly, it will boost the sentiment for further investment in to the power sector. For all the above reasons, this is a positive development for the sector. This was much awaited and finally it has come through. Q: You seemed to suggest that this package will improve liquidity perhaps immediately for state electricity boards with huge amounts of outstanding dues. Are you referring to the transitional finance mechanism that seems to have been put in place? Is the TFC support crucial to the ease in liquidity that you seem to be hinting at?
A: Yes, you are right. It is difficult to comment because at this point of time we are not aware of the final details of the transitional finance mechanism. But for the past three-to-four years, distribution companies have been financing their operating losses through short-term bank loans and at a certain point in time, the banking system stopped the flow of further funding. This led to the delay in payment to power generators and traders. That is how the whole value chain and liquidity was stuck.
Once this package is worked out, the banking system will also have more confidence in lending to distribution companies although short-term finance has been barred. I believe some sort of mechanism could be worked out whereby the distribution companies will have further access to the financing. Also Read: SEBs to benefit from holistic debt restructuring pkg: APP
It is very difficult to assume that distribution companies will be able to start generating operating profits within a short span of time. They have assumed the timeframe of three years which could extend to four years as some experts believe. In the meantime, distribution companies will definitely need some spurt of liquidity. And after this restructuring package, states, the Centre and lending agencies will come forward to aid distribution companies. Q: What do you expect to be the fate of the bonds that these distribution companies will issue initially? Is this in some way the start of an initiative that will have to be further amended in the package because there are some people who say these bond issue is perhaps just measure to postpone dealing with the problem?
A: I do not think that it is a postponement of dealing with the problem. As we have seen in the past, bonds which were issued eight or nine years ago towards dues were paid on time. I believe that the bonds in the books of the distribution companies of the state governments will be paid up.
It will be difficult for the banking system to offload these bonds in the secondary market. So probably the banks will have to continue to carry these bonds in their books. On the other hand, the banks also realised that the short-term loans that they have lent to the distribution companies are not likely to be paid in the near-term and will be returned over the longer-term only. Q: What is the likely impact that that the lenders will have to bear since they are restructuring the balance 50 percent of the Rs 1,90,000 crore?
A: All of us are yet to read the fine print, but the details which were available do not indicate any hit on the principal for the bank. At the same time, there are no indications of a reduction in the interest rates at which these loans were given to the distribution companies. There could be an adverse impact if there was any reduction in interest rate on the bonds.