The government plans to restructure the debt of state electricity boards (SEBs) and power distribution companies. However, the details of the package have not been disclosed. The rate increases some states have announced would also improve the liquidity of these SEBs, though not substantially.
The plan to restructure debts is over and above the proposal to revamp short-term debt of Rs 1,20,000 crore of these entities.
Several estimates and figures on the size of the debt have been doing the rounds. While a section of analysts say the collective debt of SEBs and power distribution companies stands at about Rs 5,00,000 crore, analysts at Standard and Poor’s (S&P) say the power sector’s current debt is seven per cent of the banking sector’s outstanding loans. This, in absolute terms, adds up to Rs 3,30,000 crore. Distribution companies account for 25 per cent of this debt.
The government’s plan proposes to restructure only a part of the loans to distribution companies. Half the loans to these companies would be transferred to the respective state government, for which the distributing companies would issue bonds. The companies would have to service only the interest on revamped loans, while state governments would service interest on the bonds. Banks and financial institutions may reschedule the rest of the loans, with a moratorium of up to three years on repayment of the principal amount, according to an S&P report.
Under the scheme, distribution companies could be asked to reduce transmission and distribution losses and raise rates, if required. S&P believes at six cents a unit, India has the lowest power rate in Asia and, therefore, there’s room for more rises.
However, not many analysts believe this plan would work, as this would only offer stressed power entities a temporary reprieve. Despite debt restructuring, some SEBs continue to borrow money.
Analysts say as long as these entities borrow, their cashflow is under pressure. For the financial health of the power sector to improve, the tariff regime has to become more transparent and the practice of giving subsidies and distributing free power has to end. With several states heading for elections next year and the general elections merely a year and a half away, the government is unlikely to do away with free power. This means banks would continue to take a hit on these assets and stress for these entities would start piling up, yet again.