State discoms' debt recast only postpones stress: India Ratings

The rating agency says the root causes of revenue gap - transmission losses and insufficient tariffs - have not been properly addressed

Debt restructuring by state power distribution companies’ (discoms) only postpones their financial stress and doesn't lead to a permanent solution, according to India Ratings.

The rating agency said on Wednesday that the root causes of revenue gap — transmission losses and insufficient tariffs — have not been properly addressed. This could result in bank debt to discoms turning into non-performing assets (NPAs), it added.

The Reserve Bank of India’s Financial Stability Report 2015 has also cautioned against the high probability of restructured discoms’ debt being classified as NPAs.      

The financial restructuring package (FRP) - which allows state governments to underwrite cash flow shortfalls in discoms as equity or interest-free loans, if annual projections in FRPs were not achieved - has only deferred problems, not resolved them, India Ratings noted. This is in view of the absence of requisite tariff hikes, power purchase cost rationalisation (lowering of short-term power purchase by 5-10 per cent from FY14), a reduction in cross-subsidy, and aggregate technical and commercial losses, it added.

This, according to the rating agency, poses a systemic risk, as the financial position of state discoms that had undertaken FRP in October 2012 has not improved. The outstanding debt of the seven discoms (Rajasthan, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand, Bihar, and Andhra Pradesh), which had their debt restructured, has grown 23.3 per cent to Rs 2,75,400 crore in FY15 over FY13.

Under FRP, discoms in Rajasthan have restructured debt of Rs 20,000 crore. The Rajasthan state government has floated a request for proposal inviting bids for the preparation of a debt-restructuring package for the state’s discoms, indicating liquidity stress.