As per the package, states will bear half of the liability of distribution companies or state electricity boards (SEBs) in a phased manner in two to five years, while the balance will be restructured by banks by extending the repayment period from three to five years.
State governments have two options: Repay debt or adopt the debt recast plan and issue bonds, which currently do not have the statutory liquidity ratio (SLR) status. Given the economic slowdown and rising bad loans, banks have turned risk-averse, preferring SLR bonds which are easier to trade or liquidate.
Since the central bank mandates some SLR holding now a minimum of 23% of net demand and time liabilities invested in government and other approved securities banks prefer investments in state government bonds only if these bonds too have SLR status.
Banks have indicated that if state governments especially those which have already breached their Fiscal Responsibility and Budget Management (FRBM) Act target of 3% of gross state domestic product or are near to it choose to issue bonds, they would find it difficult to subscribe to them.
The package was planned keeping in mind the FRBM target, which means states must bring down their overall borrowings.
If they (fiscally weak states) prefer the bond route without SLR status, banks may not subscribe. Without SLR status, there is no incentive for banks, Punjab National Bank (PNB) chairman and managing director KR Kamath told FE.
However, power secretary P Uma Shankar told FE: We dont anticipate any problems as the package was finalised with the consent of the banks. It was indicated to the banks that these bonds may not get SLR status. We have not so far received any representation from banks expressing their reluctance.
Sources say electoral considerations played a major role in crafting the scheme and the government bypassed the department of financial services reservations on some provisions. Though the power ministry had initially mooted SLR status, the proposal did not go through, they added.
Without SLR status, states may have to offer higher interest rates, which also means bigger outgo.
However, with the general elections in 2014 and some assembly polls next year itself, not many of them will be able to take in more debt than what they already have on their budget. Madhya Pradesh (another state going to polls next year) has opted out, while others like Punjab are debt-stressed.
The Centre has asked states to expedite finalising the debt restructuring in order to meet the December 31 cut-off date. Right now, we don't see the need to extend the deadline, the power secretary added.
Since half of all debt must be borne by the discoms/SEB, in the long-term, PSBs are banking on higher tariffs, the ability of the discoms to reduce distribution losses and better management plans to reduce losses. Around 30 discoms have indicated their willingness to raise tariffs. This year, several have already raised tariffs, though marginally, sources said.
WHEN BONDS ARE WEAK
* Bonds proposed to be issued by state governments as part of discom/SEB debt recast dont have SLR status
* Without safe SLR status, public sector banks are not keen to purchase bonds issued by financially weak states
* The recast was planned keeping in mind the FRBM target, meaning states must reduce overall borrowings
* Centre has asked states to expedite finalising the debt recast plan in order to meet the December 31 cut-off date