If it wasn’t bad enough that banks have taken a big haircut while subscribing to UDAY bonds, the coupon on them is not in keeping with market trends. The Rajasthan government will pay banks a coupon of just 8.39% on securities that do not have Statutory Liqudity Ratio (SLR) status while, as recently as last month, it paid 8.55% for Rs 800 crore of bonds that had SLR status; the loans that UDAY bonds will be replacing carry interest rates as high as 13-15% in a large number of cases. While the difference in the coupon may appear marginal, the amounts involved are large given total outstanding loans of discoms are Rs 4.3 lakh crore and 75% of this is expected to be taken over by the state governments.
Given the idea behind UDAY was to impose a market discipline on states, the Centre should not have imposed a ceiling for the coupon of up to 75 basis points over G-Secs as this goes against the concept of a free market—the coupon should have been benchmarked to the average G-Sec yield for the last six months with an appropriate spread for the illiquid nature of these bonds. In other words, at the scheme’s initial stage itself, its terms have been softened. It is to be hoped this will not be done in the future as well since states have, in any case, been given a big cushion by not subjecting these bonds to the FRBM limits till the end of FY17. Under the scheme, if losses are made beyond the levels agreed to in later years, either the states or their electricity boards will have to issue bonds to cover the loss—if these bonds are also to be issued at low rates, it reduces the UDAY discipline. In the MoUs that have been signed, states like UP and Bihar have already got a year more to achieve the loss-reduction targets as well as to equalise their costs and revenues, and the moratorium for repayment of the principal also varies from three to five years for different states.
Though the central government has sensitised state electricity regulators on the need to ensure tariff hikes are made as well as loss-reduction targets are met, it must make these binding on regulators. So, if UP’s ATC losses, for instance, are 28% in FY18 as compared to the agreed-to target of 23.63%, the regulator must award tariffs based on the 23.63% number to put pressure on the state to reform as it will have to pay for the difference. With the government also bringing in new environmental norms as well as auctioning coal/gas, power costs will go up by anywhere between 40-150 paise anyway, so the last thing we can afford is any slip-up in the UDAY targets.