With banks facing some losses post the financial restructuring of state-owned electricity distribution companies, there could be some easing up on prudential norms by the regulator, according to credit rating agency Crisil.
Called regulatory forbearance, the reprieve could include norms relating to income recognition and asset classification.
Banks could face up to Rs 4,500-crore loss from the conversion of the debt of the Discoms into State governments bonds, said Crisil in a statement.
The Cabinet Committee on Economic Affairs on Monday had approved the Financial Restructuring of State Distribution Companies (Discoms). The accumulated losses of the Discoms are estimated at Rs 1.9-lakh crore as on March 31, 2011.
Under the restructuring plan, 50 per cent of the short-term liabilities are to be taken over by State governments. This will first be converted into bonds to be issued by the Discoms to participating lenders, backed by State government guarantees.
The balance 50 per cent debt will be rescheduled, a moratorium on the principal will be provided, and the best possible terms will be offered. In its report, broking firm Emkay Global said looking at longer moratorium periods on both bonds as well balance loans, the present value losses are certain to be 5-9 per cent unless banks are offered higher interest rates.
Another pitfall for banks could be the transitional finance mechanism that requires them to finance interim losses during the three-year moratorium period.
Given the poor track record of Discoms, as evidenced by the last bailout package (2001/02), re-emergence of the revenue gap funding after the moratorium period cannot be ruled out.
According to Pawan Agrawal, Senior Director, Crisil Ratings, “The Cabinet approval for restructuring is nothing short of a lifeline for the Discoms.
“In the short term, this will ensure the resumption of much-needed flow of credit to the Discoms, and as a result, provide a boost to the entire supply chain of equipment and power suppliers as well as lenders to the sectors.”
Agrawal said there will be clear structural positives from the restructuring and that should enhance the longer-term viability of the distribution sector, improving their profitability and restoring lenders’ confidence in them.
Credit rating agency ICRA in a report said the net present value loss on restructured advances and Rs 1,500-1,600 crore of provisions on these advances could hit bank profits in 2012-13.
Emkay Global pointed out that from the Reserve Bank of India’s point of view two things are important. For many Discoms, this will be a second restructuring. Currently, according to RBI’s guidelines, an account has to be downgraded one notch in the case of a second restructuring (unless done via the corporate debt restructuring route). Thus, more clarity will be needed from the RBI on the asset classification.
Further, as in the case of Air India, the RBI may allow banks to amortise present value losses over more than one-quarter.