Banks ready for fresh exposure to SEBs, but only after recast

Having burnt their fingers once, bankers are still willing to lend to state electricity boards (SEBs) if the proposed financial restructuring package (FRP) goes through.

?If the restructuring package goes through, yes, we will be open to lending more to SEBs, because than we know the state government is definitely supporting the plan,? RK Dubey, CMD, Canara Bank told a leading TV news channel.

Similarly, SL Bansal, the chairman and managing director of Oriental Bank of Commerce (OBC), too, agreed the bank would be willing to support SEBs, once the recast package is successful. Analyst reports suggest out of all the banks that have exposure to SEBs, Canara Bank has the highest ? R22,000 crore ? followed by Union Bank of India with an exposure of R11,000 crore. OBC has a total exposure of R9,300 crore.

According to a banker, deadline for states to sign up for the FRP of their electricity boards will be extended up to June 30 from the previous deadline of March 31, 2013. With a renewed deadline, most of the states waiting to avail a restructuring package are likely to come on board.

Last month, a senior official from State Bank of India (SBI), which is the lead banker for Tamil Nadu (TN), had agreed that the TN state government banks and the TN SEB had all come on board for the debt recast package. SBI has an exposure of R3,000 crore of the R12,000-crore exposure that the consortium has.

The Tamil Nadu government will offer a 10% rate of interest on bonds, issued to banks. That would be lower than interest rate of 12-13% interest rate charged by the bank. ?The coupon on these bonds is lower than loan rates but when you are doing a restructuring you have to be prepared for some of these things,? Shyamal Acharya, deputy managing director, SBI had told FE.

Uttar Pradesh (UP), Rajasthan, and Haryana have agreed to participate in the package for their state electricity boards (SEBs). UP and Rajasthan have got their schemes approved from the government, sources close to the development said.

?Haryana, which is yet to submit its proposal, is likely to do so in the next 10-15 days,? Bansal said. OBC is the lead banker in the consortium for Haryana.

Jharkhand and Karnataka are known to have submitted their proposals separately to avail the benefits of the package and the power ministry is examining them, sources said. But, Punjab and Madhya pradesh have expressed reservations about the package.

According to terms of restructuring, these bonds would be classified in available for sale (AFS) category in the first five years. Banks need to mark to market AFS bonds every quarter. The TNSEB recast is in accordance with the Cabinet Committee on Economic Affairs (CCEA) decision to call for a bailout package for the ailing SEBs in September 2012.

Accordingly, 50% of the outstanding short-term liabilities (STL) as of March 2012 will be taken over by the state governments. This shall be first converted into bonds to be issued by the SEBs to the participating lenders, duly backed by the state government guarantees. The remaining 50% of the STLs will be rescheduled by the lenders and serviced by the SEBs with moratorium period of three years on principal repayments.

The total accumulated losses of SEBs till March 31, 2011, are estimated by Icra at R1.90 lakh crore. Around 70% of these losses are estimated to be contributed by SEBs in six states, namely, Rajasthan, Tamil Nadu, Uttar Pradesh, Haryana, Punjab and Madhya Pradesh. The department of financial services (DFS) had appointed nodal banks for preparing FRPs to restructure loans of SEBs in 10 states. While states like Andhra Pradesh have been issuing regular tariff orders each year, thus, accounting for the increased costs, others like Rajasthan and TN recently issued tariff orders after a long gap.

A Macquarie Equities Research report estimates that discoms would require an annualised tariff increase of around 10-11% to recover all costs and services of the 50% balance short-term debt (assuming 6-8% hike in coal costs and an increase in proportion of imported coal from around 15% currently to around 25% by FY2017). However, for the outliers, mainly discoms with very high current gap and substantial debt levels, the hikes required could be 15-17%.