Public sector banks will limit their exposure to loss-making state electricity boards (SEBs) by sharply cutting the amount of short-term loans extended to these entities for meeting their daily expenses and repayment of interest. As per a debt restructuring package finalised by the Prime Minister?s Office (PMO) for SEBs and distribution utilities, banks would be required to meet only 50% of the short-term loans required by these entities while the balance would have to be funded by state-owned Rural Electrification Corporation (REC) and Power Finance Corporation (PFC).

?Banks are reluctant to extend fresh loans to discoms (distribution companies) fearing that it would add to their non-performing assets (NPAs). The finance ministry was also not keen on allowing additional exposure of banks in this risky sector. It has, therefore, been decided to divide the responsibility between banks and NBFCs (non-banking financial companies),? said an official in the finance ministry privy to the development.

When contacted, PFC chairman and managing director Satnam Singh expressed his ignorance about the new proposal.

Though loans to SEBs are guaranteed by state governments, banks have now become reluctant to lend more to them (and even stopped fresh loans) due to high levels of losses and the absence of a time-bound and credible programme to restore the financial health of discoms. NBFCs have already set out stiff conditions for extending fresh loans to discoms.

The total bank loan outstanding to the power sector stands at a R3 lakh crore as per the latest Reserve Bank of India data. Power sector loans account for almost half of banks? total exposure to the infrastructure sector.

Sources said that new scheme would be put in place only after the financial restructuring package is implemented.

With the PMO’s concurrence, the package is now expected to be implemented soon after the Cabinet nod.

It is understood that an SEB debt restructuring package largely based on the recommendations of the group headed by Planning Commission member BK Chaturvedi aims to eliminate accumulated losses of over Rs 1.5 lakh crore that have been carried over by discoms over the last several years from the ever-increasing gap between discoms’ revenue and expenditure.

According to the plan formulated by the Chaturvedi panel, state governments will absorb 50% of the debt and convert it into state government bonds. These bonds would, however, be issued over a period of time to prevent states from overshooting targets contained in the Fiscal Responsibility and Budget Management Act.

The other 50% will have to be restructured by commercial banks by extending the tenure for repayment of loans by two to five years. It is also possible that banks agree on a moratorium on interest. During the restructuring period both banks and REC and PFC would continue to extend loan to the sector.

In the extended period, the activity of discoms would be constantly monitored to see that they make measurable progress by regularly filing for tariff revision and making efforts to reduce aggregate transmission and distribution losses through modernisation programmes, cut subsidies and start generating surpluses. The state government would also offer guarantee on fresh loan to discoms during the period when the restructuring plan is operational.

The current restructuring package follows the one in 2001-02 when the Centre had to provide a special financial package to save the state power sector from collapse. However, states do not seem to have learnt from that experience and continue to drag their feet on power sector reforms.

According to a Crisil Infrastructure Advisory report, Indian power distribution utilities need to raise tariffs by 6.5% per year over the next five years to meet rising costs due to higher fuel prices, compared with the average less than 5% hike per year implemented during the five years ending fiscal 2009-10. Even the expert Shunglu panel on the financial position of distribution companies has said there losses were primarily because of a gap of Rs 0.60/ kWh between average cost and revenue.

The average tariff-to-cost ratio for power was 82.2 in 1992-93 before falling to 67.8 in 1999-2000, and it then rose to 82.2 in 2006-07. That ratio has once again started falling and is today at 78.