The finance ministry has asked public sector lenders to form consortiums to restructure the accounts of state electricity boards (SEBs). The bank with the highest exposure to the SEB concerned should take the lead in the process, it added.
By carrying out the restructuring together, banks could put pressure on SEBs to agree to their terms and conditions, said a senior executive of a public sector bank. Usually, the terms put forth by banks were politically sensitive — raising rates, asking the state government to foot the subsidies it doled out to power consumers, etc, he added.
In consortium-based restructuring, an SEB can’t borrow from one lender to repay another. Also, the consortium comes up with the viability plan and assess the funding needs of power boards. Besides, consortium lending helps banks spread the risk and all documentation is done jointly. The credit is also monitored continuously.
In the quarter ended June, SEBs accounted for the bulk of banks’ restructured books. Central Bank of India restructured an SEB account worth Rs 2,400 crore, while Union Bank of India restructured one worth Rs 1,200 crore. The value of loans restructured by both lenders was small, excluding those to the state power boards.
On the issues facing SEBs, an analyst said, “SEBs are unable to pay up, as they are facing a crash crunch. The cost of producing power has gone up substantially. However, rates have not risen in that proportion.
Successive governments have failed to address the issue, as it is a politically sensitive topic. Governments fear increasing rates would cause them electoral harm. Thus, nobody is ready to bite the bullet.” SEBs also have high transmission and distribution losses, most of which are due to power thefts, he added.
However, the infrastructure advisory arm of ratings agency CRISIL had said Indian consumers could bear higher rates, and policymakers might have more flexibility to increase rates than what they were exercising. It had cautioned if meaningful reforms weren’t carried out, Rs 56,000 crore of power sector loans could turn bad by March 2013.
Banks continued to fund SEB losses because they felt the governments concerned would ultimately pay for these. But now, after bearing the brunt, banks have turned cautious in lending to SEBs.
Bankers said the power sector would continue to contribute to non-performing assets and restructured books of banks, unless big reforms, particularly raising rates in proportion to production costs, were carried out. At the end of the quarter ended June, the power sector had total debt of Rs 3.25 lakh crore, or 7.41 per cent of the non-food credit in the banking system, according to data by the Reserve Bank of India.