1. What Piyush Goyal calls a ‘zero’ financial impact is a Rs 8,000 cr annual hit to banks

What Piyush Goyal calls a ‘zero’ financial impact is a Rs 8,000 cr annual hit to banks

Union Power Minister Piyush Goyal said that the financial impact of the UDAY bonds on the Centre is ‘zero’. But the fact is that several state-owned banks are taking a big haircut immediately.

By: | Updated: March 21, 2016 8:46 PM
The minister is overstating the case by passing off a mere re-arrangement of finances—and that too at unfavourable terms to one party—as reform. (Reuters) The minister is overstating the case by passing off a mere re-arrangement of finances—and that too at unfavourable terms to one party—as reform. (Reuters)

Shobhana SubramanianUnion Power Minister Piyush Goyal told Mint newspaper that the financial impact of the UDAY bonds on the Centre is ‘zero’. But the fact is that several state-owned banks are taking a big haircut immediately. The loss in net interest income, if one assumes Rs three lakh crore of loans will be converted, could be close to Rs 8,000 crore, annually—the average lending rate is 12% while the coupon on the bonds is 8.5%– and that’s a conservative estimate. Assuming the tenure of the loans is even ten years, that’s a hit of nearly Rs 80,000 crore. Given the government owns a majority stake in these lenders and is hard pressed to even infuse Rs 25,000 crore of capital, can this be called a zero impact?

The minister is overstating the case by passing off a mere re-arrangement of finances—and that too at unfavourable terms to one party—as reform. All that has happened is that the banks have been presented with a fait accomli to accept a conversion of their loans into bonds. The alternative would have been lose the money altogether. The unfortunate truth is that when lenders are owed large sums–the total outstandings of discoms is over Rs four lakh crore—and their owners are not willing to bat for them they have little choice but to accept the terms of the borrower or live with a default. That they have no say in the coupon rate—only 8.4% for the Rajasthan bonds irrespective of the tenor—is in itself shocking.
It is true that since the bonds will be issued by state governments they carry a lower risk and to that extent some capital will be freed up. But the bonds yield less than those of sovereign bonds when in fact it should be the reverse because these bonds will not qualify for SLR status. Without an SLR tag money market players like mutual funds or insurance companies will not touch them. The Reserve Bank of India (RBI) may have allowed banks to hold these to maturity shielding them from mark to market losses. But would be little consolation to banks who want these off their books as soon as possible especially since there is a moratorium on principle payments.

The question is why state governments —who the minister calles the architects of the scheme—could not have been asked to take a haircut? After all they have proved to be inefficient—–accumulated losses of discoms at the end of FY14 were Rs three lakh crore with Rajasthan topping the list with Rs 80,000 crore and Uttar Pradesh following with Rs 70,700 crore. The average ATC losses are 22%, across the country, while for Uttar Pradesh these are 32.36%. The states also behaved irresponsibly by not raising tariffs or not funding losses from their own budgets but intead piling on the loans from the banks. So why could banks not have been repaid some share of their dues—at least 15 to 20%? The states should have been asked to pay off some part of their dues and subsequently issue bonds if they needed to. That way the coupon on the bonds would have been benchmarked to the market not rigged the way they have been. This is no reform.

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  1. F
    Fair Play
    Mar 22, 2016 at 6:54 am
    While the journalist is largely correct, one glaring fact which is only tacitly implied, is the entire discom debt is now upgraded in terms of credit quality, as the debt is now taken over by the state govts. And thus the lower rate of return going forward is fully justified. Also RBI permitting that debts may be held to maturity, thereby not warranting MTM provisions also eases cost pressures on already ailing bank bottom lines. States having taken over corporate debt have also done their bit. It's a question of shared pain in the short run in the interest of avoiding defaults and domino effect inaction might have entailed. Kudos to the Power Minister and Finance Minister for conceptualing and implementing UDAY scheme.
    Reply
    1. A
      Ankit
      Mar 26, 2016 at 8:11 pm
      This journalist accepts herself that when the loans are too huge and there is nothing much to be done from the centre and the states side, the banks have to accept the terms of the borrowers.Please understand that the enormity of the problem created by subsequent governments in doling out free power for votes etc has left little room to manouvre for the present govt. This is a problem which will slowly fade over the next decade and only because of the UDAY scheme.What this journalist calls as 'no reform' is actually the last hope for India's beleaguered power sector and may well be remembered by neutral observers in days to come as the finest achievement of Piyush Goel.
      Reply
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        common man
        Mar 22, 2016 at 5:59 am
        Atrocious ignorance. Yesterday EPFO bought over Rs. 10,000 crore of these bonds and many private companies are also lining up for these. But as per the author no money market player will not touch them. Sometimes opening the mouth, exposes incompetence of these journalists
        Reply
        1. T
          tushar
          Mar 22, 2016 at 2:47 am
          Not everything can be dubbed as reform. I agree, its not a reform. But anyone who says it is using this term very casually. We have seen time and again the result of what you have suggested as a solution. Nothing happens and we come back to the same issue every 8-10years. As you rightly said, the choice with banks is to take 8.4% coupon or write off of 4lakh crore. This of it as a businessman. What would you do? I think the Government is in firefighting mode. They are trying to do what may seem to ensure that the engine kick starts again and at the same time ensure that it has long term positive implication. If UDAY is a success, than we can say that the way state governments work has been reformed. The scheme in itself is not. Govt yields for a 10year paper is 7.5% and hence to say that the coupon on them is lower than the sovereign is also not right, at least at this point of time. To put the argument upside down, its the central Government who is taking the hit. After all they are majority owner of these banks. They are subsiding the interest rate to states and still pumping equity into the banks. I think they are doing the best they can considering the options they are left with.
          Reply
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            ashok
            Mar 22, 2016 at 7:53 am
            That is not true. Please be factual. The Bond market is over supplied. Today there is huge divergence between bond yield and interest rates. UDAY is nothing but financial re-engineering.
            Reply
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              piyush goel
              Mar 22, 2016 at 3:46 pm
              mera ek hi soch hain desh ke liye kaam kro aur fir tiranga mein lipat kr chale jao. na ki apne roti sekhne mein lagey raho.
              Reply
              1. P
                piyush goel
                Mar 22, 2016 at 3:37 pm
                piyushji bura na mane aapko finance minister bnaya ja raha tha kya baat.bjp v koi dud ki dhuli nai hain. sb dikhawati krte hain.
                Reply
                1. P
                  piyush goel
                  Mar 22, 2016 at 3:44 pm
                  piyushji mein aapko bdka nai raha aap khud soche jb aapko finance minister bnana nai tha th fir bjp dilasa kyun deti hain. no doubt aap power sector mein bhut accha kaam kr rahe ho.bjp ko motivate krna chahiye na ki demoralize. upset with bjp.
                  Reply
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