State discoms get a breather on debt

State power distribution companies, or discoms, can heave a sigh of relief.

The Union Cabinet on Monday approved restructuring of more than $35 billion of debt taken on by them over the past decade.
State electricity boards (SEBs) have long been ailing because of the humongous debt they have had to raise at different points in time, mainly to feed the populist agenda of their governments. Many of them have not revised power tariffs for years and have been selling power below cost. Moreover, theft and transmission & distribution losses are high.

For the record, seven SEBs account for around 83% of the total losses of SEBs in India.

According to a report released by Crisil in 2010, the losses of state discoms rose 24% to Rs27,500 crore between 2006-07 and 2009-10, and could go up to Rs40,000 crore in 2010-11.

Predictably, the distribution companies have been borrowing for years to fund their losses, something that has put the lenders in a spot, too, as timely repayments are hard to get.

Indeed, many banks have seen their exposure to these SEBs rise to 5-7% of their respective books.

According to a report by Bank of America Merrill Lynch, Indian Bank, Union Bank of India, Bank of India, Oriental Bank of Commerce and Canara Bank are among those with the highest exposure.

Under the rescue plan approved on Monday, state governments will take on half of the short-term debt of their respective state discoms and convert them into long-term bonds over the next three years. The state government will stand guarantor for the issued bonds.

The remaining 50% of debt will be converted into long-term loans by lenders and banks will offer a moratorium on repayment of the principal for three years.

The Cabinet has also asked SEBs to reduce the gap between revenue return and cost generation.

Analysts and experts have hailed the Cabinet move.
Alok Ramachandran, associate research analyst, SBI Cap Securities, said restructuring of short-term debt will ease the finances of SEBs and help them receive fresh lending so they can buy more power and reduce the load shedding hours.

Kameswara Rao, a partner at consultancy PricewaterhouseCoopers, said the debt restructuring was necessary. “Government has to adopt and implement reforms in distribution sector and currently discussions are going on mainly focusing what measures could be mutually acceptable by all stakeholders,” said Rao.

This, however, could impact banks’ liquidity going forward as they will have to wait longer to be paid back, he cautioned, adding that the magnitude of impact will depend on each bank’s exposure in terms of short-term loans and project financing loan.

“Only short-term loans that were taken for covering losses are being restructured, and this deficit financing is around 40-50% of total loan of many SEBs,” he pointed out.

According to Rao, reforms in the distribution sector should be accompanied by regulatory changes that mandate tariff revision every year to cover the rising costs.

A franchise-based distribution model may be more saleable politically and many states like Bihar, Jharkhand, Madhya Pradesh, Uttar Pradesh have either adoped or issued bids for franchise-based distribution in the past two years, he pointed out.
Ramachandran said SEBs have already started taking positive measures. In March this year, Tamil Nadu announced a 37% tariff hike, while Andhra Pradesh and Madhya Pradesh announced 12% and 7.2% tariff hikes, respectively.

But, talking to a TV channel, VK Shunglu, who headed the high level panel on financial position of distribution utilities, said a tariff hike cannot be a solution until and unless discoms curb power theft. He also called for participation of private companies in the distribution segment. “There is no justification for tariff hike till losses are curbed and participation of private companies in power sector has shown reduction in losses.”