Banks may take upfront NPV hit on DISCOM bonds: CARE

Financial Restructuring Plan (FRP)-more of SEB bailout package, not much for banks:
The current carrot-and-stick scheme announced by the Central government to State power distribution companies is an attempt to restore power purchasing capacity of the debt-ridden DISCOMs and enable banks to recover their loans. CARE Research thinks that though this scheme is better than the earlier bailout package offered in 2002 (where no stringent conditions were put in), it puts onus on the respective states and DISCOMs and mandates them to initiate proactive measures like 1) regular tariff revision 2) curb AT&C losses sustainably (around 15% v/s 27% at present) to improve viability and 3) revenue-cost gap reduction over the moratorium period.

Moreover, the States involved in the current FRP may also find it difficult to adhere to their respective fiscal deficit limits (enacted under FRBM Act), given 1) acceptance of weaker states for the central restructuring package 2) doubts over the tariff hike momentum continuing given the approaching elections in the next 12-18 months 3) ability of states to service the increased liabilities given the dismal condition of most state finances and 4) limited room for states given bulging subsidies and anticipated slower revenue growth.

CARE Research is also cautious on banks with a higher exposure to DISCOMs especially in the seven states (approximately 90% of total banks’ DISCOMS exposure) as 1) banks may have to take upfront NPV hit on DISCOM bonds and 2) MTM losses over the bond tenure.

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