What is the immediate impact on banks of the SEB restructuring package
From our understanding of the package, the impact on the net present value would be approximately R4,000 crore. The conversion into bonds would possibly mean that banks will earn a lower coupon less than 9% that they would have earned on the loans, which would have attracted say an interest rate of 10.5% or more. Nevertheless, the coupon on the state government bond would be higher than that on a union government bond. Most of the exposure is with PSU banks they would be hit more than others.
From the banks point of view are bonds better than loans
The bonds are a debt of the state government, but are better than a government-guaranteed loan. The bonds will be issued over time perhaps between two years and five years and till that time the discom will pay interest. From a technical perspective there is no difference but the primary servicing in one case will be by the government and in the other case by the discom. The bonds held in the banks investment books can be either held in the Ready for Sale category or the Hold to Maturity category.
Could there be an NPV impact on the portion that is restructured into loans
Yes, since there is a three-year moratorium on the principal, its possible there could be some impact. However, if we look at the restructuring of discom loans over the last 15 months of roughly R60,000 crore, there has been no NPV impact. Our understanding is that there is little likelihood of an NPV loss the interest rate on the loan will be adjusted to ensure this. If the R4,000-crore hit has to be taken in one year, it would account for roughly 7-8% of the profits of the banking industry. If one considers only those banks to whom this R4,000 crore relates, then the share would obviously go up.
How much additional provisioning will banks need to make, especially if the Mahapatra Committee norms are implemented
What will be restructured are the short term loans. We do not have any estimate of the outstanding short-term loans of discoms, but we feel the total restructuring could be for R1 lakh crore. So banks would need to provide 5% of R50,000 crore if the Mahapatra committee recommendations are implemented.
The question is really how the regulator is going to view this: are they going to say R50,000 has been restructured or whether R1 lakh crore has been restructured. Also, most of what has already been restructured R60,000 crore was in the form of short-term loans and we dont know whether that will form part of the current package.