The Cabinet Committee on Economic Affairs (CCEA) has approved a financial restructuring scheme aimed at state distribution companies (discoms). The package is a positive move and give comfort on PSU banks’ exposure to discoms, more so for Allahabad, Union, OBC, Central Bank of India and also PFC and REC (though not in terms of working capital loans but overall exposure to SEBs) given: (i) loans will be backed by government guarantees and 50% will be converted into state government bonds in 2-5 years; (ii) cash flow mismatches will be ironed out given moratoriums; (iii) interest servicing too will be guaranteed by state governments, thereby eliminating slippage concerns; and (iv) mandatory conditions w.r.t. tariff hikes, lowering AT&C losses, finalizing annual audited accounts etc. will inculcate the much needed discipline. However, there are a few grey areas, particularly with respect to implementation: (1) this being a state subject, the scheme’s acceptance will be clear only post finer details are out and more so for states which have already restructured their loans; (2) rates at which bonds will be issued and resultant NPV hit for banks if any; and (3) this may qualify as a second restructuring for some states calling for RBI dispensation to prevent it from being considered as NPL.
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Interaction with discoms: awaiting finer details for enforceability
We interacted with CMDs/Director Finance of Rajasthan, UP and Punjab discoms. While they expect finer details of the package tomorrow, initial thoughts lead us to believe that: (1) discoms with a larger share of accumulated losses (i.e., TN, Haryana, UP, Rajasthan) have already restructured their short-term debts and the scheme will be acceptable only if found lucrative; (2) the CCEA approved scheme does provide for incentives by central government pertaining to both principal repayment support and grants for improving on operational efficiencies, but it also comes with riders pertaining to strict tariff revisions, audit of annual accounts, etc; and (3) acceptance will also depend on all the interested parties i.e., banks, state governments and discoms agreeing to the new scheme to override the restructuring package that they have already implemented. Hence, we remain sceptical of the scheme’s across-the-board implementation and await finer details on its enforceability.
Scheme highlights: Burden shifts to state government
· 50% of outstanding short-term liabilities (upto March 31, 2012, of INR1.9bn) to be taken over by state govts from discoms via bonds (maximum tenure 15 years) over 2-5 years. Balance to be restructured with a 3 year moratorium.
· Central government will provide incentives by way of grant equal to value of the additional energy saved (INR15bn earmarked for this) and 25% of principal repayment by state governments in the form of bonds.
· Concrete and measurable steps to improve operational performance of discoms.
Regards,
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