RBI eases interest rate norm for power debt restructuring

Agrees to a coupon rate of 8.9% for the bonds to be issued by state discoms

The Reserve Bank of India (RBI) has agreed to a coupon rate of 8.9 per cent for the bonds to be issued by state power distribution companies (discoms) under the central government-sponsored debt recast scheme, which has so far not cut much ice with states.

This eliminates a major irritant for the financial restructuring plan (FRP), as talks between the Centre and states have been stuck with the latter demanding favourable interest rate.

States had demanded lower interest rates on the bonds in order to have less financial burden on them. With RBI agreeing in principle to a formula that works to 8.9 per cent currently, more states are likely to subscribe to the FRP scheme.

The formula has four components – the government of india (GoI)’s securities of a particular nature, average spread of state government loans, spread for compensation for non-SLR (statutory liquidity ratio) status and incremental cost of capital. “RBI has given its approval for the modalities worked out for the formula for calculating coupon rate for bonds. Based on the formula, the rate works out to 8.90 per cent, though it may slightly vary from one state to another,” power secretary P Uma Shankar told Business Standard.

An increased debt burden, coupled with a higher outgo on interest payment, would have left the state governments with lower elbow room to meet the fiscal responsibility targets under the Fiscal Responsibility and Budget Management Act.

The formula for coupon rate has been decided after due consultations with lenders, Shankar said. Besides Tamil Nadu that has agreed to join the scheme, Rajasthan would now send its final restructuring plan to the ministry by April 15, a top Rajasthan government official, directly handling the FRP issue, told Business Standard. “We were asking for a coupon rate lower than nine per cent. As they have decided on 8.9 per cent now, we are finalising the details,” he said. Rajasthan’s accumulated losses currently stood at Rs 38,000 crore, highest among all states.

By the plan, half the short-term liabilities of discoms have to be taken over by the state governments by converting them into bonds. The discoms will issue these bonds, backed by state government guarantee, to participating lenders. Discoms of seven states, with 75 per cent of the Rs 2.4 lakh crore accumulated losses — Rajasthan, Punjab, Haryana, Uttar Pradesh, Madhya Pradesh, Andhra Pradesh and Tamil Nadu – alone have to issue bonds of Rs 59,813 crore.

With fresh clarity on the interest outgo on bonds, states have stepped up their efforts to sign the FRP with the power ministry. The seven major defaulting states have a total outstanding liability of Rs 1.2 lakh crore. Half of this, or Rs 59,813 crore, is to be taken over by state governments through bonds.