25% of loans to SEBs restructured

Total loans to state-owned utilities Rs 3 lakh crore, FY12 losses at Rs 2 lakh cr

Restructuring of power sector loans have picked up in the March 2012 quarter. Public sector banks have been reported in Financial Express to have restructured loans extended to state electricity boards (SEBs) of around Rs 75,000 crore.

According to Crisil, Rs 300,000 crore has been lent to state-owned utilities, which means that nearly 25% of the loan has been restructured. Further, this loan amount has been only from three SEBs from Rajasthan, Uttar Pradesh and Haryana.

Accumulated losses of SEBs stand at Rs 200,000 crore as on March 2012.

By undergoing a recast of their loans, banks have driven a hard bargain and have ensured that they do not lose out on money.

A Business Standard report says that the recast of Rajasthan state power distribution companies will be used as a framework to negotiate terms with other SEBs. According to this SEBs will be given a two year holiday to pay principal and three more years to pay loans.

Banks in turn will increase their interest rates by 100 to 150 basis points (1-1.5%). SEBs will continue to pay monthly interest installments while the state government will stand guarantee to the loan amount. State governments on their part will make prompt payment for subsidy and pay for outstanding losses. Also there will be a periodic review of tariffs.

Prima facie this looks like a win-win situation where banks get their money back along with earning in interest, further SEBs hope to break even in three years as the pressure of repayment is eased. What is missing in the proposal is the politics of power tariffs, which has been the primary reason for the financial woes of SEBs.

By not allowing power tariffs to be increased, despite having fuel escalation clauses in place, is the main reason for the woes of the SEBs. Apart from this was the election manifesto announcement of free power to agriculture. To gain political power all promises have repeatedly been broken. Three-fourth of the losses of SEBs has been over the last five years and has been mainly funded by borrowings. These losses have been on account of refusal to increases power tariff to gain political mileage.

Crisil has estimated that tariffs need to be hiked by an average of 50 percent for SEBs to just break even. One of the other clauses of restructuring is that no new bank funding will be available to SEBs to fund their losses. Given the current political scenario and the slowing economy, it will be difficult to bind the governments to their promises.

Unless politics is taken out of power sector there is little hope for improvement. Restructuring has only pushed the inevitable a few years forward.