States are likely to ask banks to take a haircut on the loans they gave to power distribution companies (discoms) as part of a deal to help lenders recover pending dues cumulatively running to over R3,50,000 crore.
Under the deal, states will issue bonds to the banks as payment for discoms? dues. But since this wsill eat up the borrowing room of state governments, they will be allowed to tap the Reserve Bank of India (RBI) for more headroom under the fiscal responsibility Act, as a one-time exemption.
The two-way support is what the Centre is working out to eliminate the huge liabilities of discoms, which have crippled the power sector. Currently, banks are running a massive liability on their books for the loans discoms took to finance their operations. The numbers are so high the RBI recently instructed banks not to provide any fresh loans to these companies.
Discoms have come to this condition as they have not raised electricity tariffs for a long time, in some cases for as long as five years, under political pressure from state governments. State-level electricity regulatory commissions have allowed this condition to fester as they too have gone along with states? fears against raising electricity prices.
The BK Chaturvedi committee set up by the Centre to suggest ways to get over this impasse is expected to suggest that state governments should take over the loans of the discoms on their books, but at a discount.
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In order to ensure good behaviour, the discoms will sign MoUs with state regulatory commissions promising to break even by four years and immediately raise tariffs on all categories of consumers. At present, no state has such architecture in place.
Once discom liabilities are taken on the state budgets, the respective government will issue bonds at a discount to banks. These bonds will be tradeable but will not have the status of statutory liquidity ratio (SLR) securities. They will also come with an interest payment forbearance of three or five years.
Since banks otherwise face the possibility of zero realisation of dues from discoms, government officials feel banks will accept the new terms which will, in turn, convert these accounts in their books as standard assets.
Since discoms? liabilities on state budgets will be huge, the Centre is outlining an incentive: It will provide a matching grant to states for the extent of improvement in reduction of losses made by the discoms. It will be in addition to the accelerated power development and reforms programme funds, which are already part of the Twelfth Plan.