State electricity boards' debt revamp positive for banks

Though profitability of affected banks would be hit in FY13, it would have a positive impact in the long term

The power sector is likely to be the latest beneficiary of the government’s reforms push. The market is expecting the government to accept the Chaturvedi panel’s recommendations on accumulated debt of state electricity boards (SEBs). The panel has suggested that 50 per cent of the loans of SEBs be taken up by the respective state governments and the remaining 50 per cent be restructured by banks and financial institutions. The panel has suggested that loans given by the state government to power distribution companies be converted into equity or the repayment deferred.

If the recommendations are accepted, banks and financial institutions, which have exposure to SEBs will be positively impacted, claim analysts. The Rs 1,50,000-crore short-term debt exposure that banks have to SEBs, has been a cause of concern for analysts, as few are in a position to repay it. Also, in future, loans to distribution companies will be made only on the basis of their credit ratings. Banks would no longer be able to lend to discoms to cover their short-term losses.

If the revamp plan is accepted, banks would no longer be staring at a non-performing asset (NPA) risk. This will enable them to lend to the sector, which they stopped after SEBs and discoms came under severe financial stress. In a note, CLSA says: “The looming NPA risk for the lenders, which was restricting fresh investments in the sector, would be addressed and the banks/FIs would have much better looking balance sheets though there might be some impact on their profit and loss account due to lower interest on government bonds/waiver of penal interest.”

This is relevant for Indian Bank, Union Bank, Bank of India, Oriental Bank and Canara Bank as these have the highest exposure to the sector. State Bank of India has no exposure to SEBs at all. The restructuring would impact FY13 profits of these banks due to the lower interest charged and moratorium on repayment of principal. Bank of America Merrill Lynch says: “We believe the net present value hits arising from an interest rate cut of two per cent, with 10-year repayment and three-year principal moratorium for Union, Indian Bank and Canara Bank is 6-12 per cent of FY13 PBT earnings.” Though profitability would be hit, their Tier-1 capital may improve, maintain analysts. Analysts believe that after the Chaturvedi panel’s recommendations on SEB debt is addressed, the next item on the government’s radar would be fuel availability and pricing.