Ratings and analysis agency CARE estimates that banks may need to take a hit of Rs 6,000 crore on account of the proposed restructuring of bank loans.
Recently, the Cabinet approved a financial restructuring plan for the state-owned electricity distribution companies. Under this plan, half of the short term liabilities would be taken over by the respective state governments, in a phased manner. The other half need to be restructured by banks with a 3-year moratorium.
The big question is, what will be the interest rate that the bonds issued by the state electricity distribution companies to the banks will carry. Given the lack of clarity on the interest rate at which the bonds will be issued by the SEBs, risk premium and term premium, it is difficult to calculate the loss in Net Present Value terms in the books of the banks. CARE Research expects that in the short term (up to two years) the scheme would entail a risk of NPV hit, if bond coupon is lower coupled with the rollover of MTM losses thus impacting the banks’ earnings.
CARE has assumed an 8 per cent NPV hit on the first 50 per cent of the loans (that are to be converted into state-government-guaranteed bonds) and 2 per cent hit on the other 50 per cent, that is to be restructured by the banks with a 3-year moratorium. On the basis of these assumptions, CARE says that banks might need to take a hit of close to Rs 6,000 crore, (if the states accept the government’s plan.)
The only positive for the banks is the fact that the bonds, being state government guaranteed, will attract a lesser risk-weight, and consequently the banks will need to set aside lesser amounts as capital, against the bonds.
Doubt over state’s ability
The major discoms-in-distress are of seven states—Andhra Pradesh, Madhya Pradesh, Uttar Pradesh, Tamil Nadu, Punjab, Haryana and Rajasthan. CARE has expressed doubt over the ability of three of these States—Punjab, MP and UP—to be able to assume the liabilities of its electricity distribution companies. (CARE’s analysis makes no mention of the fact that Uttar Pradesh has said that it would not participate in the scheme.) CARE’s doubt arises from the fact that assuming the liabilities will cause the States to breach the limits set by the Fiscal Responsibility and Budget Management Act.
The prevailing financial condition of state government finances is not very encouraging. The fiscal deficit of all the seven states being studied is already over 2 per cent of their respective GSDP due to slowing economy and unabated expenditure. As per the FRBM Act, state governments are mandated to maintain the fiscal deficit of around 3 per cent of their GSDP (3.5 per cent in case of Punjab). However, the fiscal deficit of the mentioned seven states is already between 2.1 per cent and 2.98 per cent (3.26 per cent in case of Punjab) as per their 2012-13 budgets. Thus, they have very limited fiscal room to absorb any more liabilities on their books, says CARE.